# Barclays Bank PLC ## Annual Report 2006 ### Earn, invest and grow *** ## Contents - 2 Business review - 12 Directors’ report - 14 Directors and Officers - 14 Statement of Directors’ responsibilities for accounts - 15 Independent Auditors’ report - 16 Accounting policies - 26 Consolidated income statement - 27 Balance sheets - 28 Statements of recognised income and expense - 29 Cash flow statements - 30 Notes to the accounts In this document the terms ‘Bank’ and ‘Company’ refer to Barclays Bank PLC and the terms ‘Barclays’ and ‘Group’ refer to Barclays Bank PLC and its subsidiaries. The information in the notes to the accounts relates to the Group unless stated otherwise. Registered and Head office: 1 Churchill Place London E14 5HP Tel: +44 (0)20 7116 1000 *** ## Business review ### Financial highlights and performance indicators **25%** Increase in income to £21,656m **36%** Rise in profit before tax to £7,197m ### Global Retail and Commercial Banking **UK Banking** - 11.5m Current accounts - 780,000 Business customers **Barclaycard** - 9.8m UK customers - 6.4m International cards in issue **International Retail and Commercial Banking** - 1,613 International branches including Absa Barclays is a major global financial services provider engaged in retail and commercial banking, credit cards, investment banking, wealth management and investment management services. Operating in over 50 countries and employing 123,000 people, we move, lend, invest and protect money for over 27 million customers and clients worldwide. With over 300 years of history and expertise in banking, Barclays has six major businesses. UK Banking delivers banking products and services to over 14 million retail customers and 780,000 businesses in the UK. Barclaycard is one of the leading credit card businesses in Europe, and has 9.8 million UK customers and 6.4 million international cards in issue. International Retail and Commercial Banking operations have over 2 million clients, in geographies which currently include France, Spain, Portugal, Italy, India, Africa and the Middle East. Absa has an additional 8.3 million retail customers. Barclays Capital, the investment banking division, provides corporate, institutional and government clients with solutions to their financing and risk management needs. Barclays Global Investors is one of the world’s largest asset managers and a leading provider of investment management products and services. Total assets under management at 31st December 2006 were US$1.8trn. Barclays Wealth serves affluent, high net worth and intermediary clients worldwide, providing private banking, asset management, stockbroking, offshore banking, wealth structuring and financial planning services. At 31st December 2006, total client assets were £93bn. ### 3 Year Overview For the year ended 31st December | Income statement | 2006 £m | 2005 £m | 2004(a) £m | | --- | --- | --- | --- | | Total income net of insurance claims | 21,656 | 17,364 | 14,117 | | Impairment charges | (2,154) | (1,571) | (1,093) | | Operating expenses | (12,674) | (10,527) | (8,536) | | Profit before tax | 7,197 | 5,311 | 4,589 | | Profit attributable to equity holders | 4,914 | 3,695 | 3,263 | **Notes** (a) Does not reflect the application of IAS 32, IAS 39 and IFRS 4 which became effective from 1st January 2005. *** ## Business review ### Investment Banking and Investment Management **7.5%** Tier 1 capital ratio **11.5%** Risk asset ratio **Barclays Capital** US$409bn Value of debt issued globally **Barclays Global Investors** US$1,814bn Assets under management **Barclays Wealth** £93bn Total client assets “Barclays had an excellent year in 2006. We delivered outstanding performance in Barclays Capital and Barclays Global Investors. Momentum has accelerated in UK Retail Banking and Absa has outperformed our acquisition business plan delivering very strong growth. Conditions in UK cards and consumer loans were difficult but Barclaycard UK consumer credit performance is beginning to improve. We are well positioned to deliver further growth in the years ahead.” John Varley, Group Chief Executive **Excellent financial results reflect the successful execution of strategy:** - Income up 25% to £21,656m - Profit before tax up 36% to £7,197m **Excluding gains on business disposals of £323m:** - Profit before tax up 29% to £6,874m - Income growth of 25% was well ahead of expense growth of 20%. Expense growth reflected significant investment in organic growth across the business and performance related costs. - UK Banking delivered a further three percentage points underlying improvement in the cost:income ratio; the six percentage point target for 2005-2007 has been achieved a year ahead of schedule; we still target a further two percentage point improvement in 2007. - Outstanding growth in Barclays Capital was driven by continued expansion of the business, the success of past investment and the focus of our client driven model. - Barclays Global Investors delivered another year of excellent growth. Assets under management increased US$301bn to US$1.8trn. - Absa’s first full year contribution was well ahead of the acquisition business plan. - Barclaycard profits were affected by industry-wide impairment pressures in UK cards and unsecured loans; UK consumer credit performance is beginning to improve. - Capital ratios strengthened through retained earnings and active balance sheet management; the Tier 1 capital ratio rose to 7.5%. - Approximately 50% of profits came from outside the UK. ```mermaid graph TD A[2004] -- 4589 --> B[Profit before tax £m] C[2005] -- 5311 --> B D[2006] -- 7197 --> B ``` **Note** (a) Does not reflect the application of IAS 32, IAS 39 and IFRS 4 which became effective from 1st January 2005. *** ## Business review ### Financial review #### Group financial performance The Group’s profit before tax in 2006 increased 36% (£1,886m) to £7,197m (2005: £5,311m). Income increased 25% (£4,292m) to £21,656m (2005: £17,364m) whilst operating expenses rose 20% (£2,147m) to £12,674m (2005: £10,527m). Impairment charges rose 37% (£583m) to £2,154m (2005: £1,571m). #### Business performance In UK Banking we made significant strides towards our strategic priority of building the best bank in the UK. Strong growth in income enabled us to increase our profit before tax 17% to £2,578m. The improvement in the cost:income ratio was four percentage points in headline terms to 52% (2005: 56%). Excluding the impact of property gains and accelerated investment, the improvement in the cost:income ratio was three percentage points making a cumulative total for 2005-2006 of six percentage points. This means that we have achieved our target of a six percentage point improvement over the period 2005-2007, one year ahead of schedule. We continue to target a further two percentage point improvement in the cost:income ratio for 2007 to 51%. At Barclaycard profit before tax fell 40% to £382m. Good income growth of 8%, driven by very strong momentum in Barclaycard International, was more than offset by a further rise in impairment charges, principally in the UK lending portfolios, and by higher costs, mainly as a result of continued investment in Barclaycard US. In the UK, high debt levels and changing attitudes to bankruptcy and debt default contributed to increased impairment charges. As the consumer lending market in the UK changes, Barclaycard is repositioning its business to achieve sustainable, profitable growth. Higher borrowing by UK consumers, lower disposable household incomes and a tougher regulatory environment have seen Barclaycard take a number of actions. The business focused on tighter lending criteria and improved collections throughout 2006 and, as a consequence, believes we have passed the worst in Barclaycard UK impairment in the second half of 2006. There has also been a review of some partnership businesses and lending to higher risk customers. An operational review is also under way, to improve efficiency and enhance Barclaycard’s ability to provide the best service to customers, wherever they are in the world. We continued to invest in Barclaycard US. Since we bought the business in December 2004, outstandings have grown from US$1.4bn to US$4.0bn, and cards in issue have increased from 1.1 million to 4.2 million. Income grew 73% in 2006. We are on track to become profitable in 2007. International Retail and Commercial Banking achieved a step change in profitability to £1,270m (2005: £633m), reflecting the inclusion of Absa for a full year, the impact of corporate development activity and growth in key geographies. Barclays Capital produced an outstanding performance with profit before tax rising 56% to £2,232m. Income growth of 39% was driven by doing more business with new and existing clients and was broadly based across asset classes and geographies. Growth was particularly strong in areas where we have invested in recent years, including commodities, equity products and credit derivatives. Profit growth was accompanied by improvements in productivity: income and profits grew significantly faster than Daily Value at Risk, risk weighted assets, economic capital, regulatory capital and costs. The ratio of compensation costs to net income improved two percentage points to 49% and the cost:net income ratio improved three percentage points to 64%. We continued to invest for future growth, increasing headcount 3,300 including 1,300 from the acquisition of HomEq, a US mortgage servicing business. Barclays Global Investors delivered excellent results, with profit before tax up 32% to £714m. Income growth of 26% was attributable to increased management fees, particularly in the iShares and active businesses. Assets under management grew US$301bn to US$1.8trn, including net new assets of US$68bn, reflecting very strong inflows in iShares and active assets. The cost:income ratio improved two percentage points to 57%. Barclays Wealth profit before tax rose 28% to £213m. This reflected broadly based income growth and favourable market conditions, partially offset by a significant increase in investment in people and infrastructure to build a platform for future growth. Total client assets increased 19% to £93bn. The cost:income ratio improved three percentage points to 79%. In Head office functions and other operations the loss before tax decreased £78m to £214m, reflecting the Head office relocation costs incurred in 2005. *** ## Business review ### Principal risks and uncertainties The following discussion sets forth certain risk factors that the Group believes could cause its actual future results to differ materially from expected results. However, other factors could also adversely affect the Group results and so the factors discussed in this report should not be considered to be a complete set of all potential risks and uncertainties. #### Business conditions and general economy The profitability of Barclays businesses could be adversely affected by a worsening of general economic conditions in the United Kingdom, globally or in certain individual markets such as the US or South Africa. Factors such as interest rates, inflation, investor sentiment, the availability and cost of credit, the liquidity of the global financial markets and the level and volatility of equity prices could significantly affect the activity level of customers, for example: - An economic downturn or significantly higher interest rates could adversely affect the credit quality of Barclays on-balance sheet and off-balance sheet assets by increasing the risk that a greater number of Barclays customers would be unable to meet their obligations. - A market downturn or worsening of the economy could cause the Group to incur mark to market losses in its trading portfolios. - A market downturn could reduce the fees Barclays earns for managing assets. For example, a higher level of domestic or foreign interest rates or a downturn in trading markets could affect the flows of assets under management; and - A market downturn would be likely to lead to a decline in the volume of transactions that Barclays executes for its customers and, therefore, lead to a decline in the income it receives from fees and commissions and interest. #### Credit risk Credit risk is the risk of suffering financial loss, should any of the Group’s customers, clients or market counterparties fail to fulfil their contractual obligations to the Group. Credit risk may also arise where the downgrading of an entity’s credit rating causes the fair value of the Group’s investment in that entity’s financial instruments to fall. The credit risk that the Group faces arises mainly from commercial and consumer loans and advances, including credit card lending. Furthermore, credit risk is manifested as country risk where difficulties may arise; in the country in which the exposure is domiciled thus impeding or reducing the value of the asset; or where the counterparty may be the country itself. Settlement risk is another form of credit risk and is the possibility that the Group may pay a counterparty – for example, a bank in a foreign exchange transaction – but fail to receive the corresponding settlement in return. #### Market risk The most significant market risks the Group faces are interest rate, credit spread, foreign exchange, commodity price and equity price risks. Changes in interest rate levels, yield curves and spreads may affect the interest rate margin realised between lending income and borrowing costs. Changes in currency rates, particularly in the Sterling-US Dollar, Sterling-Euro and Sterling-Rand exchange rates, affect the value of assets and liabilities denominated in foreign currencies and affect earnings reported by the Group’s non-UK subsidiaries and may affect revenues from foreign exchange dealing. The performance of financial markets may cause changes in the value of the Group’s investment and trading portfolios and in the amount of revenues generated from assets under management. The Group has implemented risk management methods to mitigate and control these and other market risks to which it is exposed. However, it is difficult to predict with accuracy changes in economic or market conditions and to anticipate the effects that such changes could have on the Group’s financial performance, business operations and the value of assets held in the Group’s pension and long-term assurance funds. #### Capital risk Capital risk is the risk that the Group has insufficient capital resources to: - Meet minimum regulatory capital requirements in the UK and in other markets such as the US and South Africa where regulated activities are undertaken. The Group’s authority to operate as a bank is dependent upon the maintenance of adequate capital resources. - Support its strong credit rating. In addition to capital resources, the Group’s rating is supported by a diverse portfolio of activities, an increasingly international presence, consistent profit performance, prudent risk management and a focus on value creation. A weaker credit rating would increase the Group’s cost of funds; and - Support its growth and strategic options. The Group’s capital management activities seek to maximise shareholder value by optimising the level and mix of its capital resources. Capital risk is mitigated by: - ensuring access to a broad range of investor markets; - management of the Group’s demand for capital; and - management of the exposure to foreign currency exchange rate movements. #### Liquidity risk This is the risk that the Group is unable to meet its obligations when they fall due and to replace funds when they are withdrawn, with consequent failure to repay depositors and fulfil commitments to lend. The risk that it will be unable to do so is inherent in all banking operations and can be impacted by a range of institution specific and market-wide events including, but not limited to, credit events, merger and acquisition activity, systemic shocks and natural disasters. #### Operational risks The Group’s businesses are dependent on the ability to process a large number of transactions efficiently and accurately. Operational risks and losses can result from fraud, employee errors, failure to properly document transactions or to obtain proper internal authorisation, failure to comply with regulatory requirements and conduct of business rules, equipment failures, natural disasters or the failure of external systems. Although the Group has implemented risk controls and loss mitigation actions, and substantial resources are devoted to developing efficient procedures and to staff training, it is only possible to be reasonably, but not absolutely, certain that such procedures will be effective in controlling each of the operational risks faced by the Group. #### Insurance risk Insurance risk is the risk that the Group will have to make higher than anticipated payments to settle claims arising from its long-term and short-term insurance businesses. #### Legal risk The Group is subject to a comprehensive range of legal obligations in all countries in which it operates. As a result, the Group is exposed to many forms of legal risk, which may arise in a number of ways. Primarily: - the Group’s business may not be conducted in accordance with applicable laws around the world; - contractual obligations may either not be enforceable as intended or may be enforced against the Group in an adverse way; - the intellectual property of the Group (such as its trade names) may not be adequately protected; and - the Group may be liable for damages to third parties harmed by the conduct of its business. The Group faces risk where legal proceedings are brought against it. Regardless of whether such claims have merit, the outcome of legal proceedings is inherently uncertain and could result in financial loss. Defending legal proceedings can be expensive and time-consuming and there is no guarantee that all costs incurred will be recovered even if the Group is successful. Although the Group has processes and controls to manage legal risks, failure to manage these risks could impact the Group adversely, both financially and by reputation. #### Tax risk The Group is subject to the tax laws in all countries in which it operates. A number of double taxation agreements entered between countries also impact on the taxation of the Group. The Group is also subject to European Community tax law. Tax risk is the risk associated with changes in tax law or in the interpretation of tax law. It also includes the risk of changes in tax rates and the risk of failure to comply with procedures required by tax authorities. Failure to manage tax risks could lead to an additional tax charge. It could also lead to a financial penalty for failure to comply with required tax procedures or other aspects of tax law. If, as a result of a particular tax risk materialising, the tax costs associated with particular transactions are greater than anticipated, it could affect the profitability of those transactions. #### Effect of governmental policy and regulation The Group’s businesses and earnings can be affected by the fiscal or other policies and other actions of various governmental and regulatory authorities in the UK, the European Union (EU), the US, South Africa and elsewhere. There is continuing political and regulatory scrutiny of the operation of the retail banking and consumer credit industries in the UK and elsewhere. The nature and impact of future changes in policies and regulatory action are not predictable and beyond the Group’s control but could have an impact on the Group’s businesses and earnings. In the EU as a whole, these regulatory actions included an inquiry into retail banking in all of the then 25 Member States by the European Commission’s Directorate General for Competition. The inquiry looked at retail banking in Europe generally and the Group has fully co-operated with the inquiry. On 31st January 2007 the European Commission announced that the inquiry had identified barriers to competition in certain areas of retail banking, payment cards and payment systems in the EU. The Commission indicated it will use its powers to address these barriers, and will encourage national competition authorities to enforce European and national competition laws where appropriate. Any action taken by the Commission and national competition authorities could have an impact on the payment cards and payment systems businesses of the Group and on its retail banking activities in the EU countries in which it operates. In the UK, in September 2005 the Office of Fair Trading (OFT) received a super-complaint from the Citizens Advice Bureau relating to payment protection insurance (PPI). As a result, the OFT commenced a market study on PPI in April 2006. In October 2006, the OFT announced the outcome of the market study and, following a period of consultation, the OFT referred the PPI market to the UK Competition Commission for an in-depth inquiry on 7th February 2007. This inquiry could last for up to two years. Also in October 2006, the Financial Services Authority (FSA) published the outcome of its broad industry thematic review of PPI sales practices in which it concluded that some firms fail to treat customers fairly. The Group has cooperated fully with these investigations and will continue to do so. In April 2006, the OFT commenced a review of the undertakings given following the conclusion of the Competition Commission Inquiry in 2002 into the supply of banking services to Small and Medium Enterprises (SMEs). The Group is co-operating fully with that review. The OFT has carried out investigations into Visa and MasterCard credit card interchange rates. The decision by the OFT in the MasterCard interchange case was set aside by the Competition Appeals Tribunal in June 2006. The OFT’s investigation in the Visa interchange case is at an earlier stage and a second MasterCard interchange case is ongoing. The outcome is not known but these investigations may have an impact on the consumer credit industry in general and therefore on the Group’s business in this sector. On 9th February 2007 the OFT announced that it was expanding its investigation into interchange rates to include debit cards. The OFT announced the findings of its investigation into the level of late and over-limit fees on credit cards on 5th April 2006, requiring a response from credit card companies by 31st May 2006. Barclaycard responded by confirming that it would reduce its late and over-limit fees on credit cards from 1st August 2006. On 7th September 2006, the OFT announced that it had decided to undertake a fact find on the application of its statement on credit card fees to current account unauthorised overdraft fees. The OFT expects this work to take up to six months, at which stage the OFT will consider whether a further detailed investigation into unauthorised overdraft fees is needed. On 26th January 2007, the FSA issued a Statement of Good Practice relating to Mortgage Exit Administration Fees. Barclays will charge the fee applicable at the time the customer took out the mortgage, which is one of the options recommended by the FSA. Other areas where changes could have an impact include: - the monetary, interest rate and other policies of central banks and regulatory authorities; - general changes in government or regulatory policy that may significantly influence investor decisions in particular markets in which the Group operates; - general changes in the regulatory requirements, for example, prudential rules relating to the capital adequacy framework; - changes in competition and pricing environments; - further developments in the financial reporting environment; - expropriation, nationalisation, confiscation of assets and changes in legislation relating to foreign ownership; and - other unfavourable political, military or diplomatic developments producing social instability or legal uncertainty which in turn may affect demand for the Group’s products and services. #### Impact of strategic decisions taken by the Group The Group devotes substantial management and planning resources to the development of strategic plans for organic growth and identification of possible acquisitions, supported by substantial expenditure to generate growth in customer business. If these strategic plans do not deliver as anticipated, the Group’s earnings could grow more slowly or decline. #### Competition The global financial services markets in which the Group operates are highly competitive. Innovative competition for corporate, institutional and retail clients and customers comes both from incumbent players and a steady stream of new market entrants. The landscape is expected to remain highly competitive in all areas, which could adversely affect the Group’s profitability if the Group fails to retain and attract clients and customers. #### Regulatory compliance risk Regulatory compliance risk arises from a failure or inability to comply fully with the laws, regulations or codes applicable specifically to the financial services industry. Non compliance could lead to fines, public reprimands, damage to reputation, enforced suspension of operations or, in extreme cases, withdrawal of authorisations to operate. *** ## Business review ### Supervision and regulation The Group’s operations, including its overseas offices, subsidiaries and associates, are subject to rules and regulations, including reserve and reporting requirements and conduct of business requirements, imposed by the relevant central banks and regulatory authorities. In the UK, the Financial Services Authority (FSA) is the independent body responsible for the regulation of deposit taking, life insurance, home mortgages, general insurance and investment business. The FSA was established by the Government and it exercises statutory powers under the Financial Services and Markets Act 2000. Barclays Bank PLC is authorised by the FSA to carry on a range of regulated activities within the UK and is subject to consolidated supervision. In its role as supervisor, the FSA seeks to ensure the safety and soundness of financial institutions with the aim of strengthening, but not guaranteeing, the protection of customers. The FSA’s continuing supervision of financial institutions authorised by it is conducted through a variety of regulatory tools, including the collection of information from statistical and prudential returns, reports obtained from skilled persons, visits to firms and regular meetings with management to discuss issues such as performance, risk management and strategy. The FSA adopts a risk-based approach to supervision. The starting point for supervision of all financial institutions is a systematic analysis of the risk profile for each authorised firm. The FSA has adopted a homogeneous risk, processes and resourcing model in its approach to its supervisory responsibilities (known as the ARROW model) and the results of the risk assessment are used by the FSA to develop a risk mitigation programme for a firm. The FSA also promulgates requirements that banks and other financial institutions are required to meet on matters such as capital adequacy, limits on large exposures to individual entities and groups of closely connected entities, and liquidity. Certain of these requirements derive from EU directives as described below. Banks, insurance companies and other financial institutions in the UK are subject to a single financial services compensation scheme (the Financial Services Compensation Scheme) where an authorised firm is unable or is likely to be unable to meet claims made against it because of its financial circumstances. Different levels of compensation are available to eligible claimants depending upon whether the protected claim is in relation to a deposit, a contract of insurance or protected investment business and certain types of claims are subject to maximum levels of compensation. Most deposits made with branches of Barclays Bank PLC within the European Economic Area (EEA) which are denominated in Sterling or other EEA currencies (including the euro) are covered by the Scheme. Most claims made in respect of designated investment business will also be protected claims if the business was carried on from the UK or from a branch of the bank or investment firm in another EEA member state. Outside the UK, the Group has operations (and main regulators) located in continental Europe, in particular France, Germany, Spain, Switzerland, Portugal and Italy (local central banks and other regulatory authorities); Asia Pacific (various regulatory authorities including the Hong Kong Monetary Authority, the Financial Services Agency of Japan, the Australian Securities and Investments Commission and the Monetary Authority of Singapore); Africa (various regulatory authorities including the South African Reserve Bank and the Financial Services Board) and the United States of America (the Board of Governors of the Federal Reserve System (FRB), the Office of the Comptroller of the Currency (OCC) and the Securities and Exchange Commission). In Europe, the UK regulatory agenda is considerably shaped and influenced by the directives emanating from the EU. A number of EU directives are currently being implemented, for example the Capital Requirements Directive, the Third Money Laundering Directive and the Markets in Financial Instruments Directive (‘MiFID’). These form part of the European Single Market programme, an important feature of which is the framework for the regulation of authorised firms. This framework is designed to enable a credit institution or investment firm authorised in one EU member state to conduct banking or investment business through the establishment of branches or by the provision of services on a cross-border basis in other member states without the need for local authorisation. Barclays operations in Europe are authorised and regulated by a combination of both home (the FSA) and host regulators. Barclays operations in South Africa, including Absa Group Limited, are supervised and regulated by the South African Reserve Bank (SARB) and the Financial Services Board (FSB). SARB oversees the banking industry and follows a risk-based approach to supervision whilst the FSB oversees the non-banking financial services industry and focuses on enhancing consumer protection and regulating market conduct. In the United States, Barclays Bank PLC and certain US subsidiaries and branches of the Bank are subject to a comprehensive regulatory structure, involving numerous statutes, rules and regulations, including the International Banking Act of 1978, the Bank Holding Company Act of 1956, as amended, the Foreign Bank Supervision Enhancement Act of 1991 and the USA PATRIOT Act of 2001. Such laws and regulations impose limitations on the types of businesses, and the ways in which they may be conducted, in the United States and on the location and expansion of banking business there. The Bank’s branch operations are subject to extensive federal and state supervision and regulation by the FRB, the New York State Banking Department and the OCC (in the case of Barclays Global Investors, NA); and the Delaware State Banking Commissioner and the Federal Deposit Insurance Corporation (in the case of Barclays Bank Delaware). The investment banking and asset management operations are subject to ongoing supervision and regulation by the Securities and Exchange Commission (SEC) as well as a comprehensive scheme of regulation under the US federal securities laws, as enforced by, for example, the NASD and the OCC. *** ## Business review ### Corporate responsibility #### Responsible banking The past year has seen another marked increase in the profile of corporate responsibility as a topic of global strategic significance. Two issues have dominated debate – the emergence of climate change and its consequences as the most pressing challenge facing the world and the evolution of thought on social, ethical and environmental issues under the overarching concept of ‘sustainability’. For Barclays, corporate responsibility is embodied in the concept of ‘responsible banking’ – reflecting its place at the heart of our strategy as an integral part of the way in which we do business. Firmly based on the clear values enshrined in our Guiding Principles, responsible banking means making informed, reasoned and ethical decisions in our business dealings with customers, clients, employees and our other stakeholders. Our Guiding Principles of Winning Together, Customer Focus, The Best People, Pioneering and Trusted describe how we expect our employees to behave with external stakeholders and each other. Responsible banking is the approach by which we aim to progress towards sustainability – recognising that we will succeed in our strategic and financial goals only if we have a strong commitment and focus on achieving sustainable outcomes for all stakeholders. We make our greatest contribution to society by being good at what we do and by doing so responsibly – by helping our customers meet their financial goals through providing competitive products and services that contribute to economic growth, and in contributing to healthy financial systems around the world. Our corporate responsibility priorities are informed by regular dialogue with a wide range of organisations and in 2006 we undertook a much broader programme of formal and informal dialogue with investors, non-governmental organisations, customers, our employees and politicians. Our approach is focused on the following areas: - Our customers - Financial inclusion - Responsible lending - Environment and climate change - Supply chain management - Our employees - Community investment This is underpinned by a strong governance framework. #### Governance The Group Chief Executive, supported by the Group Executive Committee, has primary responsibility for embedding ‘responsible banking’ throughout Barclays. This includes setting strategy and the identification, review and reporting of all business issues (whether risks or commercial opportunities) which have an important social, environmental or ethical dimension. The Brand and Reputation Committee, a sub-committee of Group Executive Committee, is chaired by Sir Nigel Rudd, Deputy Chairman and a non-executive Director on the Board. The Committee’s role is to identify and manage issues of reputational significance to the Barclays Group. The Committee met three times during the year. The Community Partnerships Committee sets the policy and provides governance for our global community investment, and the Environmental Steering Group provides direction and governance to support our environmental and climate change strategies. Corporate responsibility is firmly established as one of the Board Governance Standards, providing for internal control and governance and establishing ‘responsible banking’ as a key area of profile and measurement within our risk management processes. #### Ethical indices Our parent company, Barclays PLC is a long-standing member of the Dow Jones Sustainability and FTSE4Good ethical indices. Its ranking in the Business in the Community Corporate Responsibility Index rose to 3rd position out of 131 companies. In the Carbon Disclosure Project, it was ranked in the top 50 of the global FT 500 companies. #### Our customers An unswerving focus on our customers lies at the heart of our Guiding Principles. We are committed to providing them with excellent products and services and doing so in accordance with our ten established principles for treating customers fairly, with openness and with transparency. Our aim is to improve the information we give to customers so that they can make better informed decisions in line with their own circumstances and needs. We have made a large investment in improving our customer service, most notably in our UK Retail Business. We are, therefore, encouraged to see that the progress we reported last year has been maintained in the areas of customer satisfaction and advocacy, as we have implemented steps to improve products and to rectify challenges in key areas such as mortgage processing, where we have made major changes. Across our other businesses – UK Business Banking, Barclays Capital, Barclays Global Investors, Barclays Wealth and in our African and European retail operations, strong levels of customer satisfaction and advocacy have been sustained. During the year, we announced our intention to merge our network of Woolwich branches in the UK into Barclays, at the same time investing in our branch network and in the Woolwich as our mortgage brand. This will give Woolwich customers access to all Barclays branches and ATMs and vice versa. The branches we are bringing together are near neighbours – 300 metres or less apart and there will be no change in our community footprint as a result. #### Financial inclusion With 2.7 billion people across the world living on less than US$2 per day and some 2.8 million UK adults without access to a bank account, increasing financial inclusion is both a social imperative and a commercial opportunity. Our focus in this area has been on our businesses in the UK and in Africa and specifically on improving both access to banking and to affordable credit and savings. In South Africa, Absa’s Customer Education Programme is making banking more accessible to customers at the lower end of the mass market through a range of audio visual channels, whilst in the UK we continued to support agencies such as the Money Advice Trust, Citizens Advice and Business Debtline. We increased the number of our Cash Card (basic bank) Accounts, designed for low income and vulnerable people in the UK, by 85,000 to 464,000 and held a ‘roundtable’ discussion with three consumer groups – Citizens Advice, the National Consumer Council and SAFE (Services Against Financial Exclusion), an initiative of Toynbee Hall – to inform improvements and increase access to this account. New functions have been added to the account and, based on the feedback, we are giving more profile to the savings needs of these customers. In the UK, our personal current account customers can continue to make cash withdrawals free of charge through the Post Office network. *** ## Business review ### Corporate responsibility Absa has been addressing access in South Africa through various means. Portable branches are bringing banking to deprived areas, enabling a full range of transactions to be handled efficiently. 13 were opened in 2006. 1.5 million more South Africans were brought into banking via the Mzansi account, of which Absa continues to be the leading bank provider. The bank has also implemented its AllPay and Sekulula services, enabling 2.3 million social grant beneficiaries to access their payments in four provinces. We remain the leading private sector supporter of credit unions in the UK, whilst our pilot of microbanking in Ghana through the traditional Susu system proved very successful, reaching over 80,000 disadvantaged market traders and supporting the UN Millennium Development Goals. Work is now under way to develop microfinance programmes for implementation in other African countries. #### Responsible lending The consumer lending market in the UK has continued to be both intensely competitive and challenging. Our commitment is to provide clear and straightforward information to our customers so that they can readily see the terms and conditions and then make an informed personal decision. We have further developed the use of summary information on credit card and personal loan application forms and statements, to help customers understand our terms and pricing and also, for example, the implications of making only the minimum payment on their credit card outstandings. We are working closely with other banks and finance providers to share information about how people manage their accounts, in the belief that this has a key role to play in helping banks assist their customers through responsible lending practices and customer care. Another development is to encourage responsible borrowing through the introduction of our Flexi-Rate™ card, which offers a lower interest rate to those customers who repay more of their outstanding credit card balance each month. #### Environment and climate change The effects of climate change constitute the most pressing challenge to global sustainability and we continue to reflect this in our policies and actions. As a bank, our impacts are both direct – through our own operations – and indirect – through our lending and other business activities with customers and clients. One of our key initiatives has been to make our UK operations carbon-neutral. We have achieved this through significant investment in energy efficiency and through the purchase of renewable energy – 50% of our UK operations are now being supplied from renewable sources. Part of our remaining offset of over 200,000 tonnes of CO$_2$ is provided through the purchase of carbon credits in the market, together with a strong contribution from community-based sustainable energy schemes such as solar and wind power in Africa and India. ```mermaid pie title Barclays CO2 emissions from energy and travel "UK 48%" : 48 "Africa 37%" : 37 "US and Asia 12%" : 12 "Europe 3%" : 3 ``` We are also helping to combat climate change through the development of carbon-related products and services, such as our launch of the first carbon-neutral debit card in the UK. Barclays Capital continued to support the vital carbon trading market, where it remains the most active trader. Our Natural Resources Team has provided long-term finance for over 2,600MW of renewable generating capacity, including onshore windfarms, landfill gas extraction plants and bio-diesel conversion plants. We have committed strongly to the efficient management of our resources, reducing waste and increasing recycling. We extended our ISO14001 certified Environmental Management System, with our operations in France and Absa in South Africa becoming the first major banks in those countries to achieve such accreditation. As a result of this activity, we improved our score in the Dow Jones Sustainability Index, retaining our 1st position amongst global banks for environmental reporting and joint 1st in environmental performance. In the UK, we achieved 2nd position in the Business in the Environment Index. As a co-founder of the Equator Principles, which require banks to undertake detailed social and environmental impact assessments when financing projects such as dams and mines, we contributed to the revision and strengthening of the Principles. The threshold amount has been reduced from US$50m to US$10m and criteria tightened, such that they now include more robust procedures for public consultation and a greater focus on social impacts. ### Project finance deals – whole Barclays Group | Category | A Higher Risk | B Medium Risk | C Lower Risk | Total 2006 | | --- | --- | --- | --- | --- | | Number of project finance deals | 8 | 10 | 18 | 36 | | Deals completed or pending | 4 | 9 | 17 | 30 | | – of which, number where E/S(a) related changes were made | 4 | 9 | 17 | 30 | | Deals considered, but not participated in | 4 | 1 | 1 | 6 | | Projects referred from EU | 6 | 4 | 15 | 25 | | Projects referred from Africa | 1 | 2 | 2 | 5 | | Projects referred from Asia Pacific | 1 | 2 | 0 | 3 | | Projects referred from North America | 0 | 2 | 1 | 3 | (a) E/S = Environmental and social issues. During the year, we updated our internal environmental and social risk guidance, extending it to over 50 different industry sectors. This guidance, which was developed with input from environmental NGOs, now reflects more explicit information on social and other human rights-related impacts. This review also benefited from our work as the only bank participating in the Business Leaders’ Initiative on Human Rights. The guidance has been shared with the United Nations Environment Programme – Finance Initiative and has been made available to their 167 members around the world. *** ## Business review ### Corporate responsibility #### Supply chain management Responsible sourcing principles are an important component in our commitment to sustainability whilst, at the same time, enabling us to manage business risk. A key achievement in 2006 was the circulation of our new Corporate Responsibility Questionnaire to our suppliers operating in sectors of higher or medium level environmental or social risk. So far, we have reviewed some 60 suppliers, accounting for approximately £1.5bn of our total annual spend. The information gathered through our questionnaire is helping to ensure that the social and environmental policies of our suppliers are in line with Barclays own standards. In those cases where suppliers have performed relatively poorly, we intend to work with them to help them improve performance. In 2006, Absa in South Africa spent over 55% of their annual sourcing total with businesses qualifying under the Black Economic Empowerment guidelines. These support the South African Government’s objective to ensure that its citizens have the opportunity to participate in the economic progress of the country. In the UK, we worked with our cleaning contractors to secure new terms and conditions for some 2,400 cleaning staff in our 2,000 UK branches. This groundbreaking initiative means that the cleaners will now benefit from improved pay and opportunities for training, as well as access to a pension, sick pay, increased holiday entitlements and annual leave. #### Our employees The commitment, motivation and talent of our employees lies at the heart of our approach to sustainability. During 2006, we continued our pioneering partnership agreement with Amicus, our UK trade union, and signed a joint Equality Charter that commits us to advancing equality for our employees. Our annual independent Employee Opinion Survey showed further improvements. 87% of our colleagues participated in the survey and 84% expressed pride in working for Barclays, with Employee Engagement standing at 76% (72% in 2005). Employee perceptions of Barclays as a responsible company showed further strong progress. **Employee opinion survey results** (% Positive Scores) | | 2006 | 2005 | | --- | --- | --- | | Perceptions of Leadership | 62 | 58 | | Employer of Choice | 70 | 67 | | Barclays operates with integrity | 84 | 80 | | Barclays is an environmentally responsible company | 77 | 76 | | Barclays is a socially responsible company | 83 | 80 | | I am proud to work for Barclays | 84 | 80 | Diversity amongst our employees is both a long-term commitment and a business imperative. 21% of our senior employees are female and this is a start, but we accept that there is more to do. We boosted our intake of disabled graduates to our summer internship programme with good progress across our businesses and we benefited from a proactive partnership with Spain’s Fundación Once. 6% of our UK senior managers are now from an ethnic minority background whilst, over the past five years, the number of our ethnic minority employees in the UK has risen from 7% to 13%. In South Africa, Absa continued to make strong progress with its commitments under the Financial Sector Charter to increase the number of black managers at all levels and, as a sub-set, black female managers. **UK employment statistics** | | 2006 | 2005 | 2004 | | --- | --- | --- | --- | | Total employee headcount | 62,400 | 59,100 | 60,000 | | Average length of service (years) | 9.8 | 10.2 | 10.5 | | Percentage working part time | 21.8% | 23.7% | 24.6% | | Sickness absence rate | 4.0% | 4.2% | 4.4% | | Turnover rate | 19.0% | 20.0% | 19.3% | | Resignation rate | 12.0% | 11.5% | 11.8% | | **Women in Barclays** | | | | | Percentage of all employees | 61.0% | 62.2% | 63.4% | | Percentage of management grades | 33.0% | 30.9% | 30.5% | | Percentage of senior executives | 12.9% | 10.9% | 10.5% | | **Ethnic minorities in Barclays** | | | | | Percentage of all employees | 12.7% | 11.3% | 10.5% | | Percentage of management grades | 8.1% | 7.1% | 7.0% | | Percentage of senior executives | 6.1% | 3.6% | 3.3% | | **Disabled employees in Barclays** | | | | | Percentage of all employees | 5.0% | 3.4% | 3.2% | **Notes** All headcount and FTE numbers relate to direct employees therefore excluding agency staff and contractors. All employee statistics relate to Barclays in the UK excluding Barclays Global Investors (approx 800 UK employees). All data as at 31st December. Percentage of disabled employees is derived using responses to the GRCB and Central Support Employee Opinion Survey, 84% of UK employees. Sickness Absence percentage excludes Barclays Capital population. UK historical data has been restated to include Barclays Capital and therefore will differ from previously reported figures. Occupational health is an important concern for us and we maintain a comprehensive HIV/AIDS programme across all our African businesses. This provides counselling, testing and treatment, including free anti-retroviral drugs, for our employees and their dependants. We also have extensive schemes to support business customers and our wider communities and have been active in supporting malaria programmes in various African countries. #### Community investment 2006 was an important year for our community investment programme. After extensive research and consultation with stakeholders both inside and outside Barclays, we are now implementing a global programme that unites all our businesses across the world and which complements our business strategy. Our investment is now being directed towards three key themes: - Banking on brighter futures - Looking after local communities - Charity begins at work *** ## Business review ### Corporate responsibility Banking on brighter futures focuses on the provision of money advice, tackling financial exclusion, helping disadvantaged people into work and supporting their broader education. An example of our initiatives is Barclaycard Horizons – a three-year, £3m community programme with four national partners, which aims to support 50,000 disadvantaged single parents in working their way out of debt and poverty. Looking after local communities is about investing in the many neighbourhoods around the world where we have a presence. By far our biggest community project in the UK is Barclays Spaces for Sports, now in its third and final year. To date, over 120 community sports facilities have been completed and 3,600 coaching kits provided to local groups, benefiting some 320,000 people in disadvantaged areas. Charity begins at work is dedicated to, and driven, by our employees. In 2006, 33,000 Barclays employees and pensioners around the world received support for fundraising or volunteering. One focus of our volunteering is Make a Difference Day, now covering 25 countries worldwide. Last year, 11,000 employees contributed their business skills, with international participation up 63% compared to the previous year. We are a member of the PerCent Club – a group of companies that has undertaken to ensure that investment in the community over time amounts to at least 1% of UK pre-tax profit. #### Further information Barclays PLC’s 2006 Corporate Responsibility Report contains more detailed information on our activities and will be available from 26th April 2007 and online at www.barclays.com/corporateresponsibility. We are committed to providing more information on these issues and our report has been produced taking account of the international AA1000 Standard and the 2002 Global Reporting Initiative sustainability reporting guidelines, including the Financial Sector Supplements. *** ## Directors’ report ### Report of the Directors #### Business review and principal activities The Company is required to set out in this report a fair review of the business during the financial year ended 31st December 2006 and a description of the principal risks and uncertainties facing the Company (known as a ‘Business Review’). The information that fulfils the requirements of the Business Review can be found on pages 2 to 11. From the perspective of the Bank the review of the business and the principal risks and uncertainties facing the Company are integrated with the review of Barclays PLC, the Bank’s ultimate parent. Therefore additional information may be found in the 2006 Annual Report of Barclays PLC which does not form part of this report. Barclays is a major global financial services provider engaged in retail and commercial banking, credit cards, investment banking, wealth management and investment management services. Barclays operates through branches, offices and subsidiaries in the UK and overseas. The results of the Group show a pre-tax profit of £7,197m (2005: £5,311m) for the year and profit after tax of £5,256m (2005: £3,872m). The Group had net assets of £27,106m at 31st December 2006 (2005: £24,243m). #### Profit Attributable The profit attributable to Barclays PLC, the Bank’s ultimate parent, for the year 2006 amounted to £4,914m (2005: £3,695m). #### Dividends Total dividends on ordinary shares paid during 2006 are set out in Note 1 to the accounts. Dividends paid on preference shares for the year ended 31st December 2006 amounted to £174m (2005: £74m). #### Share Capital Ordinary share capital was increased during the year by the issue to Barclays PLC of 11 million ordinary shares, credited as fully paid, in consideration of cash payments of £179m. Preference share capital was increased in the year by the issue of 30,000,000 Non-Cumulative Callable US Dollar Preference Shares of US$0.25, credited as fully paid, in consideration of net proceeds of US$727m (£406m), of which the nominal value was US$7.5m and the balance was share premium. #### Annual Report on Form 20-F An Annual Report on Form 20-F is being filed with the US Securities and Exchange Commission (SEC) and copies will be available from one of the Joint Secretaries on request to the Head office at 1 Churchill Place, London E14 5HP. It is possible to read and copy documents that have been filed by Barclays PLC and Barclays Bank PLC with the SEC at the SEC’s office of Investor Education and assistance located at 100 F Street, NE, Washington DC 20549-0213. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms and their copy charges. Filings with the SEC are also available to the public from commercial document retrieval services, and from the website maintained by the SEC at www.sec.gov. #### Directors The Directors of the Bank are listed on page 14. The Directors’ interests in shares are set out in Note 46. The membership of the Boards of the Bank and of Barclays PLC is identical. Frederik (Frits) Seegers was appointed as an executive Director with effect from 10th July 2006. Fulvio Conti and Marcus Agius were appointed as non-executive Directors with effect from 1st April 2006 and 1st September 2006 respectively. Sir David Arculus retired from the Board on 27th April 2006 and Robert Steel retired from the Board on 11th October 2006. Matthew Barrett and David Roberts left the Board on 31st December 2006. Chris Lucas will join the Board as Group Finance Director on 1st April 2007 and Naguib Kheraj will leave the Board on 31st March 2007. #### Directors’ Indemnities Qualifying third-party indemnity provisions (as defined by Section 309B of the Companies Act 1985) were in force during the course of the financial year ended 31st December 2006 for the benefit of the then Directors and, at the date of this report, are in force for the benefit of the Directors in relation to certain losses and liabilities which they may incur (or have incurred) in connection with their duties, powers or office in relation to the Company and certain associated companies (as defined in Section 309A(6) of the Companies Act 1985). Qualifying third-party indemnity provisions are also in force, at the date of this report, for the benefit of the directors of certain associated companies. #### Community Involvement The total commitment for 2006 was £46.5m (2005: £39.1m). Barclays committed £39.6m in support of the community in the UK (2005: £35.3m) and £6.9m was committed in international support (2005: £3.8m). The UK commitment includes £35.2m of charitable donations (2005: £16.7m). Barclays is a member of the PerCent Club – a group of companies that have undertaken to ensure that donations to the community over time amount to at least 1% of their UK pre-tax profit. Barclays has an extensive community programme covering many countries around the world. The Group provides funding and support to over 8,279 charities and voluntary organisations, ranging from small, local charities like Passage (UK) to international organisations like Unicef. We also have a very successful employee programme which in 2006 saw more than 33,000 employees and pensioners worldwide taking part in Barclays supported volunteering, giving and fundraising activities. #### Employee Involvement Barclays is committed to ensuring that employees share in the success of the Company. Staff are encouraged to participate in share option and share purchase schemes and have a substantial sum invested in the shares of Barclays PLC. Employees are kept informed of matters of concern to them in a variety of ways, including the corporate news magazines, intranets, briefings and mobile phone SMS messaging. These communications help achieve a common awareness among employees of the financial and economic factors affecting the performance of Barclays. Barclays is also committed to providing employees with opportunities to share their views and provide feedback on issues that are important to them. An annual (bi-annual in the case of BGI) Employee Opinion Survey is undertaken with results being reported to the Board and all employees. Roadshows and employee forums also take place. In addition, Barclays undertakes regular and formal Group, business unit and project specific consultations with Amicus, our recognised union. *** ## Directors’ report #### Equality and Diversity The diversity agenda at Barclays seeks to include customers, colleagues and suppliers. Our objective is to recruit and retain the best people, regardless of (but not limited to) race, religion, age, gender, sexual orientation or disability. We strive to ensure our workforce reflects the communities in which we operate, and the international nature of the organisation. We recognise that diversity is a key part of responsible business strategy in support of our increasingly global business. Barclays is committed to providing additional support to employees with disabilities and making it easier for them to inform us of their specific requirements including the introduction of a dedicated intranet site. Through our Reasonable Adjustments Scheme, appropriate assistance can be given, including both physical workplace adjustments, and relevant training and access to trained mentors is also provided for disabled employees. A wide range of recruitment initiatives have been taken to increase the number of people with disabilities working in Barclays. #### Creditors’ Payment Policy Barclays values its suppliers and acknowledges the importance of paying invoices, especially those of small businesses, promptly. Normal policy is to pay all small business purchases within 30 days. It is Barclays practice to agree terms with suppliers when entering into contracts. We negotiate with suppliers on an individual basis and meet our obligations accordingly. The Company does not follow any specific published code or statement on payment practice. Paragraph 12(3) of Schedule 7 of the Companies Act 1985 requires disclosure of trade creditor payment days. The Company’s accounts are prepared in accordance with International Financial Reporting Standards. The components for the trade creditor calculation are not easily identified. However, by identifying as closely as possible the components that would be required if Schedule 9 of the Companies Act applied, the trade creditor payment days for the Company for 2006 were 28 days (2005: 35 days). This is an arithmetical calculation and does not necessarily reflect our practice, which is described above, nor the experience of any individual creditor. #### Financial Instruments Barclays financial risk management objectives and policies, including the policy for hedging each major type of forecasted transaction for which hedge accounting is used, and the exposure to market risk, credit risk and liquidity risk are set out in Note 13 and Notes 52 to 57 to the accounts. #### Events after the Balance Sheet Date On 19th January 2007 Barclays announced that it entered into an agreement to purchase EquiFirst Corporation, the non-prime mortgage origination business of Regions Financial Corporation, for a consideration of approximately US$225m. Completion, which is subject to receipt of the required licences and applicable regulatory approval, as well as a post-closing adjustment based on EquiFirst’s balance sheet at the actual completion date, is expected in the first half of 2007. On 8th February 2007 Barclays completed the acquisition of Indexchange Investment AG from Bayerische Hypo-und Vereinsbank for a consideration of approximately €240m. #### The Auditors The Board Audit Committee reviews the appointment of the external auditors, as well as their relationship with the Group, including monitoring the Group’s use of the Group’s auditors for non-audit services and the balance of audit and non-audit fees paid to the auditors. Having reviewed the independence and effectiveness of the external auditors, the Committee has recommended to the Board that the existing auditors, PricewaterhouseCoopers LLP, be reappointed. So far as each of the Directors are aware, there is no relevant audit information of which the Company’s auditors are unaware. Each of the Directors has taken all the steps that he ought to have taken as a Director in order to make himself aware of any relevant audit information and to establish that the Company’s auditors are aware of that information. For these purposes, ‘relevant audit information’ means information needed by the Company’s auditors in connection with preparing their report. PricewaterhouseCoopers LLP have signified their willingness to continue in office and ordinary resolutions reappointing them as auditors and authorising the Directors to set their remuneration will be proposed at the 2007 AGM. By order of the Board Lawrence Dickinson Joint Secretary 8th March 2007 *** ## Directors and Officers and Statement of Directors’ responsibilities for accounts ### Current Directors and Officers Marcus Agius – Chairman **Executive Directors** John Varley – Group Chief Executive Naguib Kheraj – Group Finance Director Robert E Diamond Jr – President, Barclays PLC, Chief Executive, Investment Banking and Investment Management Gary Hoffman – Group Vice Chairman Frits Seegers – Chief Executive, Global Retail and Commercial Banking **Non-executive Directors** Sir Nigel Rudd, DL – Deputy Chairman Sir Richard Broadbent Richard (Leigh) Clifford Fulvio Conti Dr Danie Cronjé Professor Dame Sandra Dawson Sir Andrew Likierman Stephen Russell Sir John Sunderland **Note** Chris Lucas will join the Board as Group Finance Director on 1st April 2007 and Naguib Kheraj will leave the Board on 31st March 2007. | Current Executive Committee members | | Appointed to Executive Committee | | --- | --- | --- | | John Varley | Group Chief Executive | 1996 | | Robert E Diamond Jr | President, Barclays PLC, Chief Executive, Investment Banking and Investment Management | 1997 | | Paul Idzik | Chief Operating Officer | 2004 | | Naguib Kheraj | Group Finance Director | 2003 | | Frits Seegers | Chief Executive, Global Retail and Commercial Banking | 2006 | | Other Officers | | Appointed to position | | --- | --- | --- | | Jonathan Britton | Financial Controller | 2006 | | Lawrence Dickinson | Joint Secretary | 2002 | | Patrick Gonsalves | Joint Secretary | 2002 | | Mark Harding | General Counsel | 2003 | | Robert Le Blanc | Risk Director | 2004 | ### Statement of Directors’ Responsibilities for Accounts **Going Concern** The Directors confirm they are satisfied that the Group and the Company have adequate resources to continue in business for the foreseeable future. For this reason, they continue to adopt the ‘going concern’ basis for preparing the accounts. **Statement of Directors’ Responsibilities for Accounts** The following statement, which should be read in conjunction with the Auditors’ report set out on page 15, is made with a view to distinguishing for shareholders the respective responsibilities of the Directors and of the auditors in relation to the accounts. The Directors are required by the Companies Act 1985 to prepare accounts for each financial year and, with regards to Group accounts, in accordance with Article 4 of the IAS Regulation. The Directors have prepared individual accounts in accordance with IFRS as adopted by the European Union. The accounts are required by law and IFRS to present fairly the financial position of the Company and the Group and the performance for that period; the Companies Act 1985 provides in relation to such accounts, that references in the relevant part of the law to accounts giving a true and fair view are references, to their achieving fair presentation. The Directors consider that, in preparing the accounts on pages 16 to 130, the Group has used appropriate accounting policies, supported by reasonable and prudent judgements and estimates, and that all accounting standards which they consider to be applicable have been followed. The Directors have responsibility for ensuring that the Company and the Group keep accounting records which disclose with reasonable accuracy the financial position of the Company and the Group and which enable them to ensure that the accounts comply with the Companies Act 1985. The Directors have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. *** ## Independent Auditors’ report ### UK Audit Report of the Independent Auditors to the Members of Barclays Bank PLC We have audited the Group and Parent Company financial statements (the ‘financial statements’) of Barclays Bank PLC for the year ended 31st December 2006 which comprise Group income statement, the Group and Parent Company balance sheets, the Group and Parent Company cash flow statements, the Group and Parent Company statements of recognised income and expense and the related notes on pages 26 to 130. These financial statements have been prepared under the accounting policies set out therein on pages 16 to 24. **Respective Responsibilities of Directors and Auditors** The directors’ responsibilities for preparing the Annual Report and the financial statements in accordance with applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union are set out in the Statement of Directors’ Responsibilities. Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). This report, including the opinion, has been prepared for and only for the company’s members as a body in accordance with Section 235 of the Companies Act 1985 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. We report to you our opinion as to whether the financial statements give a true and fair view and have been properly prepared in accordance with the Companies Act 1985 and, as regards the group financial statements, Article 4 of the IAS Regulation. We also report to you whether in our opinion the information given in the Directors’ Report is consistent with the financial statements. In addition we report to you if, in our opinion, the company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding directors’ remuneration and other transactions is not disclosed. We read other information contained in the Annual Report and consider whether it is consistent with the audited financial statements. The other information comprises only the Business Review and the Directors’ Report. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information. **Basis of Audit Opinion** We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the group’s and company’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. **Opinion** In our opinion: - the Group financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the Group’s affairs as at 31st December 2006 and of its profit and cash flows for the year then ended; - the Parent Company financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union as applied in accordance with the provisions of the Companies Act 1985, of the state of the Parent Company’s affairs as at 31st December 2006 and cash flows for the year then ended; - the financial statements have been properly prepared in accordance with the Companies Act 1985 and, as regards the group financial statements, Article 4 of the IAS Regulation; and - the information given in the Directors’ Report is consistent with the financial statements. PricewaterhouseCoopers LLP Chartered Accountants and Registered Auditors London, United Kingdom 8th March 2007 **Notes** (a) The maintenance and integrity of the Barclays Bank PLC website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website. (b) Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. *** ## Accounts Barclays Bank PLC ### Accounting policies **Significant Accounting Policies** **1. Reporting entity** These financial statements are prepared for the Barclays Bank PLC group (‘Barclays’ or ‘the Group’) under section 227(2) of the Companies Act 1985. The Group is an international financial services group engaged in the provision of a wide range of financial services, including banking, investment banking, venture capital and asset management. In addition, individual financial statements have been prepared for the parent undertaking, Barclays Bank PLC, under section 226(2)(b) of the Companies Act 1985. Barclays Bank PLC is a public limited company, incorporated England and Wales and having a registered office in England and Wales. **2. Compliance with International Financial Reporting Standards** The consolidated financial statements of the Barclays Bank PLC Group, and the individual financial statements of Barclays Bank PLC, have been prepared in accordance with International Financial Reporting Standards (IFRSs) and interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC), as adopted by the European Union. They are also in accordance with IFRSs as published by the International Accounting Standards Board (IASB) and interpretations issued by IFRIC. The principal accounting policies applied in the preparation of the consolidated and individual financial statements are set out below. These policies have been consistently applied. **3. Basis of preparation** The consolidated and individual financial statements have been prepared under the historical cost convention modified to include the fair valuation of certain financial instruments and contracts to buy or sell non-financial items and trading inventories to the extent required or permitted under accounting standards and as set out in the relevant accounting polices. They are stated in millions of pounds Sterling, (£m), the currency of the country in which Barclays Bank PLC is incorporated. **Critical accounting estimates** The preparation of financial statements in accordance with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise judgement in the process of applying the accounting policies. The notes to the financial statements set out areas involving a higher degree of judgement or complexity, or areas where assumptions are significant to the consolidated and individual financial statements such as fair value of financial instruments (note 58), allowance for loan impairment (note 16), goodwill (note 23), intangible assets (note 24), and retirement benefit obligations (note 35). **4. Consolidation** **Subsidiaries** The consolidated financial statements combine the financial statements of Barclays Bank PLC and all its subsidiaries, including certain special purpose entities where appropriate, made up to 31st December. Entities qualify as subsidiaries where the Group has the power to govern the financial and operating policies of the entity so as to obtain benefits from its activities, generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered in assessing whether the Group controls another entity. Details of the principal subsidiaries are given in Note 47. Subsidiaries are consolidated from the date on which control is transferred to the Group and cease to be consolidated from the date that control ceases. The acquisition method of accounting is used to account for the purchase of subsidiaries. The cost of an acquisition is measured at the fair value of the assets given, equity instruments issued and liabilities incurred or assumed, plus any costs directly related to the acquisition. The excess of the cost of an acquisition over the Group’s share of the fair value of the identifiable net assets acquired is recorded as goodwill. See accounting policy 14 for the accounting policy for goodwill. Intra-group transactions and balances are eliminated on consolidation and consistent accounting policies are used throughout the Group for the purposes of the consolidation. As the consolidated financial statements include partnerships where a Group member is a partner, advantage has been taken of the exemption of Regulation 7 of the Partnerships and Unlimited Companies (Accounts) Regulations 1993 with regard to the preparation and filing of individual partnership financial statements. **Associates and joint ventures** An associate is an entity in which the Group has significant influence, but not control, over the operating and financial management policy decisions. This is generally demonstrated by the Group holding in excess of 20%, but no more than 50%, of the voting rights. A joint venture exists where the Group has a contractual arrangement with one or more parties to undertake activities typically, though not necessarily, through entities which are subject to joint control. Unless designated as at fair value through profit and loss as set out in policy 7, the Group’s investments in associates and joint ventures are initially recorded at cost and increased (or decreased) each year by the Group’s share of the post-acquisition net income (or loss), or other movements reflected directly in the equity of the associated or jointly controlled entity. Goodwill arising on the acquisition of an associate or joint venture is included in the carrying amount of the investment (net of any accumulated impairment loss). When the Group’s share of losses in an associate or joint venture equals or exceeds the recorded interest, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the entity. The Group’s share of the results of associates and joint ventures is based on financial statements made up to a date not earlier than three months before the balance sheet date, adjusted to conform with the accounting policies of the Group. Unrealised gains on transactions are eliminated to the extent of the Group’s interest in the investee. Unrealised losses are also eliminated unless the transaction provides evidence of impairment in the asset transferred. In the individual financial statements of Barclays Bank PLC, investments in subsidiaries, associates and joint ventures are stated at cost less impairment, if any. **5. Foreign currency translation** The consolidated and individual financial statements are presented in sterling, which is the functional currency of the parent company. Items included in the financial statements of each of the Group’s entities are measured using their functional currency, being the currency of the primary economic environment in which the entity operates. Foreign currency transactions are translated into the appropriate functional currency using the exchange rates prevailing at the dates of the transactions. Monetary items denominated in foreign currencies are retranslated at the rate prevailing at the period end. Foreign exchange gains and losses resulting from the retranslation and settlement of these items are recognised in the income statement except for qualifying cash flow hedges or hedges of net investments. See accounting policy 12 for the policies on hedge accounting. *** ## Accounts Barclays Bank PLC ### Accounting policies Non-monetary assets that are measured at fair value are translated using the exchange rate at the date that the fair value was determined. Exchange differences on equities and similar non-monetary items held at fair value through profit or loss, are reported as part of the fair value gain or loss. Translation differences on equities classified as available-for-sale financial assets and non-monetary items are included directly in equity. For the purposes of translation into the presentational currency, assets, liabilities and equity of foreign operations are translated at the closing rate, and items of income and expense are translated into sterling at the rates prevailing on the dates of the transactions, or average rates of exchange where these approximate to actual rates. The exchange differences arising on the translation of a foreign operation are included in cumulative translation reserves within shareholders’ equity and included in the profit or loss on disposal or partial disposal of the operation. Goodwill and fair value adjustments arising on the acquisition of foreign subsidiaries are maintained in the functional currency of the foreign operation, translated at the closing rate and are included in hedges of net investments where appropriate. On transition to IFRS, the Group brought forward a nil opening balance on the cumulative foreign currency translation adjustment arising from the re-translation of foreign operations, which is shown as a separate item in shareholders’ equity. **6. Interest, fees and commissions** **Interest** Interest is recognised in interest income and interest expense in the income statement for all interest-bearing financial instruments classified as held to maturity, available for sale or other loans and receivables using the effective interest method. The effective interest method is a method of calculating the amortised cost of a financial asset or liability (or group of assets and liabilities) and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts the expected future cash payments or receipts through the expected life of the financial instrument, or when appropriate, a shorter period, to the net carrying amount of the instrument. The application of the method has the effect of recognising income (and expense) receivable (or payable) on the instrument evenly in proportion to the amount outstanding over the period to maturity or repayment. In calculating effective interest, the Group estimates cash flows (using projections based on its experience of customers’ behaviour) considering all contractual terms of the financial instrument but excluding future credit losses. Fees, including those for early redemption, are included in the calculation to the extent that they can be measured and are considered as an integral part of the effective interest rate. Cash flows arising from the direct and incremental costs of issuing financial instruments are also taken into account in the calculation. Where it is not possible to otherwise estimate reliably the cash flows or the expected life of a financial instrument, effective interest is calculated by reference to the payments or receipts specified in the contract, and the full contractual term. **Fees and commissions** Unless included in the effective interest calculation, fees and commissions are recognised on an accruals basis as the service is provided. Fees and commissions not integral to effective interest arising from negotiating, or participating in the negotiation of a transaction from a third party, such as the acquisition of loans, shares or other securities or the purchase or sale of businesses, are recognised on completion of the underlying transaction. Portfolio and other management advisory and service fees are recognised based on the applicable service contracts. Asset management fees related to investment funds are recognised over the period the service is provided. The same principle is applied to the recognition of income from wealth management, financial planning and custody services that are continuously provided over an extended period of time. Commitment fees, together with related direct costs, for loan facilities where draw down is probable are deferred and recognised as an adjustment to the effective interest on the loan once drawn. Commitment fees in relation to facilities where draw down is not probable are recognised over the term of the commitment. **Insurance premiums** Insurance premiums are recognised in the period earned. **Net trading income** Income arises from the margins which are achieved through market-making and customer business and from changes in market value caused by movements in interest and exchange rates, equity prices and other market variables. Trading positions are held at fair value and the resulting gains and losses are included in the Income statement, together with interest and dividends arising from long and short positions and funding costs relating to trading activities. **Dividends from subsidiaries** In the individual financial statements of Barclays Bank PLC, dividends from subsidiaries are accounted for on the basis of dividends received in the accounting period. **7. Financial assets and liabilities** **Financial Assets** The Group classifies its financial assets in the following categories: financial instruments at fair value through profit or loss; loans and receivables; held to maturity investments and available for sale financial assets. Management determines the classification of financial assets and liabilities at initial recognition. **Financial instruments at fair value through profit or loss** Financial instruments are classified in this category if they are held for trading, or if they are designated by management under the fair value option. Instruments are classified as held for trading if they are: (i) acquired principally for the purposes of selling or repurchasing in the near term; (ii) part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking; or (iii) a derivative, except for a derivative that is a financial guarantee contract or a designated and effective hedging instrument. Financial instruments cannot be transferred into or out of this category after inception. Financial instruments included in this category are recognised initially at fair value and transaction costs are taken directly to the Income statement. Gains and losses arising from changes in fair value are included directly in the income statement. The instruments are derecognised when the rights to receive cash flows have expired or the Group has transferred substantially all the risks and rewards of ownership and the transfer qualifies for derecognition. Regular way purchases and sales of financial instruments held for trading or designated under the fair value option are recognised on trade date, being the date on which the Group commits to purchase or sell the asset. *** ## Accounts Barclays Bank PLC ### Accounting policies The fair value option is used in the following circumstances: (i) financial assets backing insurance contracts and financial assets backing investment contracts are designated at fair value through profit or loss because the related liabilities have cash flows that are contractually based on the performance of the assets or the related liabilities are insurance contracts whose measurement incorporates current information. Fair valuing the assets through profit and loss significantly reduces the recognition inconsistencies that would arise if the financial assets were classified as available for sale. (ii) financial assets, loans to customers, financial liabilities, financial guarantees and structured notes may be designated at fair value through profit or loss if they contain substantive embedded derivatives. (iii) financial assets, loans to customers, financial liabilities, financial guarantees and structured notes may be designated at fair value through profit or loss where doing so significantly reduces measurement inconsistencies that would arise if the related derivatives were treated as held for trading and the underlying financial instruments were carried at amortised cost. (iv) Certain private equity and other investments that are managed, and evaluated on a fair value basis in accordance with a documented risk management or investment strategy and reported to key management personnel on that basis. **Loans and receivables** Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and which are not classified as available for sale. Loans and receivables are initially recognised at fair value including direct and incremental transaction costs. They are subsequently valued at amortised cost, using the effective interest method (see accounting policy 6 on page 17). They are derecognised when the rights to receive cash flows have expired or the Group has transferred substantially all the risks and rewards of ownership. Regular way purchases and sales of loans and receivables are recognised on contractual settlement. **Held to maturity** Held to maturity investments are non-derivative financial assets with fixed or determinable payments that the Group’s management has the intention and ability to hold to maturity. They are initially recognised at fair value including direct and incremental transaction costs. They are subsequently valued at amortised cost, using the effective interest method (see accounting policy 6). They are derecognised when the rights to receive cash flows have expired. Purchases of held to maturity financial assets are recognised on trade date, being the date on which the Group commits to purchase the asset. **Available for sale** Available for sale assets are non-derivative financial assets that are designated as available for sale and are not categorised into any of the other categories described above. They are initially recognised at fair value including direct and incremental transaction costs. They are subsequently held at fair value. Gains and losses arising from changes in fair value are included as a separate component of equity until sale when the cumulative gain or loss is transferred to the income statement. Interest determined using the effective interest method (see accounting policy 6), impairment losses and translation differences on monetary items are recognised in the income statement. The assets are derecognised when the rights to receive cash flows have expired or the Group has transferred substantially all the risks and rewards of ownership. Regular way purchases and sales of available for sale financial instruments are recognised on trade date, being the date on which the Group commits to purchase or sell the asset. **Financial liabilities** Financial liabilities are measured at amortised cost, except for trading liabilities and liabilities designated at fair value, which are held at fair value through profit or loss. Financial liabilities are derecognised when extinguished. **Determining fair value** Where the classification of a financial instrument requires it to be stated at fair value, this is determined by reference to the quoted bid price or asking price (as appropriate) in an active market wherever possible. Where no such active market exists for the particular asset or liability, the Group uses a valuation technique to arrive at the fair value, including the use of prices obtained in recent arms’ length transactions, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants. Profits or losses are only recognised on initial recognition when such profits can be measured solely by reference to observable current market transactions or valuation techniques based solely on observable market inputs. **8. Impairment of financial assets** The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a portfolio of financial assets carried at amortised cost is impaired. A financial asset or portfolio of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more loss events that occurred after the initial recognition of the asset and prior to the balance sheet date (‘a loss event’) and that loss event or events has had an impact on the estimated future cash flows of the financial asset or the portfolio that can be reliably estimated. Objective evidence that a financial asset or a portfolio is impaired includes observable data that comes to the attention of the Group about the following loss events: a) significant financial difficulty of the issuer or obligor; b) a breach of contract, such as a default or delinquency in interest or principal payments; c) the lender, for economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a concession that the lender would not otherwise consider; d) it becomes probable that the borrower will enter bankruptcy or other financial reorganisation; e) the disappearance of an active market for that financial asset because of financial difficulties; or f) observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the portfolio, including: (i) adverse changes in the payment status of borrowers in the portfolio; (ii) national or local economic conditions that correlate with defaults on the assets in the portfolio. *** ## Accounts Barclays Bank PLC ### Accounting policies The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment. For loans and receivables and assets held to maturity, the amount of impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the asset’s original effective interest rate. The amount of the loss is recognised using an allowance account and recognised in the income statement. The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflect the cash flows that may result from foreclosure costs for obtaining and selling the collateral, whether or not foreclosure is probable. For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar risk characteristics, taking into account asset type, industry, geographical location, collateral type, past due status and other relevant factors. These characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the counterparty’s ability to pay all amounts due according to the contractual terms of the assets being evaluated. Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets in the group and historical loss experience for assets with credit risk characteristics similar to those in the group. Historical loss experience is adjusted based on current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not currently exist. The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. Following impairment, interest income is recognised using the original effective rate of interest which was used to discount the future cash flows for the purpose of measuring the impairment loss. When a loan is uncollectable, it is written off against the related provision for loan impairment. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off are credited to the income statement. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognised in the income statement. Equity securities acquired in exchange for loans and advances in order to achieve an orderly realisation are accounted for as a disposal of the loan and an acquisition of equity securities. Where control is obtained over an entity as a result of the transaction, the entity is consolidated. Any further impairment of the assets or business acquired is treated as an impairment of the relevant asset or business and not as an impairment of the original instrument. In the case of equity instruments classified as available for sale, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether impairment exists. Where such evidence exists, the cumulative net loss that has been previously recognised directly in equity is removed from equity and recognised in the income statement. In the case of debt instruments classified as available for sale, impairment is assessed based on the same criteria as all other financial assets. Reversals of impairment of debt instruments are recognised in the income statement. Reversals of impairment of equity shares are not recognised in the income statement, increases in the fair value of equity shares after impairment are recognised directly in equity. **9. Sale and repurchase agreements (including stock borrowing and lending)** Securities may be lent or sold subject to a commitment to repurchase them (a ‘repo’). Such securities are retained on the balance sheet when substantially all the risks and rewards of ownership remain with the Group, and the counterparty liability is included separately on the balance sheet as appropriate. Similarly, where the Group borrows or purchases securities subject to a commitment to resell them (a ‘reverse repo’) but does not acquire the risks and rewards of ownership, the transactions are treated as collateralised loans, and the securities are not included in the balance sheet. The difference between sale and repurchase price is accrued over the life of the agreements using the effective interest method. Securities lent to counterparties are also retained in the financial statements. Securities borrowed are not recognised in the financial statements, unless these are sold to third parties, at which point the obligation to repurchase the securities is recorded as a trading liability at fair value and any subsequent gain or loss included in net trading income. **10. Securitisation transactions** Certain Group undertakings have issued debt securities or have entered into funding arrangements with lenders in order to finance specific loans and advances to customers. All financial assets continue to be held on the Group balance sheet, and a liability recognised for the proceeds of the funding transaction, unless: (i) substantially all the risks and rewards associated with the financial instruments have been transferred, in which case, the assets are derecognised in full or; (ii) if a significant portion, but not all, of the risks and rewards have been transferred, the asset is derecognised entirely if the transferee has the ability to sell the financial asset, otherwise the asset continues to be recognised only to the extent of the Group’s continuing involvement. Where (i) or (ii) above applies to a fully proportionate share of all or specifically identified cash flows, the relevant accounting treatment is applied to that proportion of the asset. **11. Collateral and netting** The Group enters into master agreements with counterparties whenever possible and, when appropriate, obtains collateral. Master agreements provide that, if an event of default occurs, all outstanding transactions with the counterparty will fall due and all amounts outstanding will be settled on a net basis. **Collateral** The Group obtains collateral in respect of customer liabilities where this is considered appropriate. The collateral normally takes the form of a lien over the customer’s assets and gives the Group a claim on these assets for both existing and future liabilities. *** ## Accounts Barclays Bank PLC ### Accounting policies The Group also receives collateral in the form of cash or securities in respect of other credit instruments, such as stock borrowing contracts, and derivative contracts in order to reduce credit risk. Collateral received in the form of securities is not recorded on the balance sheet. Collateral received in the form of cash is recorded on the balance sheet with a corresponding liability. These items are assigned to deposits received from bank or other counterparties. Any interest payable or receivable arising is recorded as interest expense or interest income respectively except for funding costs relating to trading activities which are recorded in net trading income. **Netting** Financial assets and liabilities are offset and the net amount reported in the balance sheet if, and only if, there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or to realise an asset and settle the liability simultaneously. In many cases, even though master netting agreements are in place, the lack of an intention to settle on a net basis results in the related assets and liabilities being presented gross in the balance sheet. **12. Derivatives and hedge accounting** Derivatives are used to hedge interest rate, exchange rate, commodity, and equity exposures and exposures to certain indices such as house price indices and retail price indices related to non-trading positions. In addition, the use of derivatives and their sale to customers as risk management products is an integral part of the Group’s trading activities. Derivatives entered into for hedging purposes and for trading purposes include foreign exchange, interest rate, credit, equity and commodity derivatives mainly in the form of swaps, forwards, options and combinations of these instrument types. **Derivatives** Derivatives are measured initially at fair value and subsequently remeasured to fair value. Fair values are obtained from quoted prices prevailing in active markets, including recent market transactions, and valuation techniques, including discounted cash flow models and option pricing models as appropriate. All derivatives are included in assets when their fair value is positive, and liabilities when their fair value is negative, unless there is the legal ability and intention to settle net (as per accounting policy 11). **Embedded derivatives** Some hybrid contracts contain both a derivative and a non-derivative component. In such cases, the derivative component is termed an embedded derivative. Where the economic characteristics and risks of the embedded derivatives are not closely related to those of the host contract, and the host contract itself is not carried at fair value through profit or loss, the embedded derivative is bifurcated and reported at fair value with gains and losses being recognised in the income statement. Profits or losses cannot be recognised on the initial recognition of embedded derivatives unless the host contract is also carried at fair value. **Hedge accounting** Where derivatives are held for risk management purposes, and when transactions meet the criteria specified in IAS 39, the Group applies fair value hedge accounting, cash flow hedge accounting, or hedging of a net investment in a foreign operation as appropriate to the risks being hedged. When a financial instrument is designated as a hedge, the Group formally documents the relationship between the hedging instrument and hedged item as well as its risk management objectives and its strategy for undertaking the various hedging transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. The Group discontinues hedge accounting when: (i) It is determined that a derivative is not, or has ceased to be, highly effective as a hedge; (ii) the derivative expires, or is sold, terminated, or exercised; (iii) the hedged item matures or is sold or repaid; or (iv) a forecast transaction is no longer deemed highly probable. In certain circumstances, the Group may decide to cease hedge accounting even though the hedge relationship continues to be highly effective by no longer designating the financial instrument as a hedging instrument. To the extent that the changes in the fair value of the hedging derivative differ from changes in the fair value of the hedged risk in the hedged item; or the cumulative change in the fair value of the hedging derivative differs from the cumulative change in the fair value of expected future cash flows of the hedged item, the hedge is deemed ineffective. The amount of ineffectiveness, provided it is not so great as to disqualify the entire hedge for hedge accounting, is recorded in the income statement. **Fair value hedge accounting** Changes in fair value of derivatives that qualify and are designated as fair value hedges are recorded in the income statement, together with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. If the hedge relationship no longer meets the criteria for hedge accounting, it is discontinued. For fair value hedges of interest rate risk, the fair value adjustment to the hedged item is amortised to the income statement over the period to maturity of the previously designated hedge relationship using the effective interest method. If the hedged item is sold or repaid, the unamortised fair value adjustment is recognised immediately in the income statement. **Cash flow hedges** For qualifying cash flow hedges, the fair value gain or loss associated with the effective portion of the cash flow hedge is recognised initially in shareholders’ equity, and recycled to the income statement in the periods when the hedged item will affect profit or loss. Any ineffective portion of the gain or loss on the hedging instrument is recognised in the income statement immediately. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was recognised in equity is immediately transferred to the income statement. **Hedges of net investments** Hedges of net investments in foreign operations, including monetary items that are accounted for as part of the net investment, are accounted for similarly to cash flow hedges; the effective portion of the gain or loss on the hedging instrument is recognised directly in equity and the ineffective portion is recognised immediately in the income statement. The cumulative gain or loss previously recognised in equity is recognised in the income statement on the disposal or partial disposal of the foreign operation. Hedges of net investments may include non-derivative liabilities as well as derivative financial instruments although for a non-derivative liability only the foreign exchange risk is designated as a hedge. **Derivatives that do not qualify for hedge accounting** Derivative contracts entered into as economic hedges that do not qualify for hedge accounting are held at fair value through profit or loss. *** ## Accounts Barclays Bank PLC ### Accounting policies **13. Property, plant and equipment** Property and equipment is stated at cost less accumulated depreciation and provisions for impairment, if any. Additions and subsequent expenditures are capitalised only to the extent that they enhance the future economic benefits expected to be derived from the assets. Depreciation is provided on the depreciable amount of items of property and equipment on a straight-line basis over their estimated useful economic lives. The depreciable amount is the gross carrying amount, less the estimated residual value at the end of its useful economic life. The Group uses the following annual rates in calculating depreciation: | | | | --- | --- | | Freehold buildings and long-leasehold property (more than 50 years to run) | 2-3.3% | | Leasehold property (less than 50 years to run) | Over the remaining life of the lease | | Costs of adaptation of freehold and leasehold property(a) | 7-10% | | Equipment installed in freehold and leasehold property(a) | 7-10% | | Computers and similar equipment | 20-33% | | Fixtures and fittings and other equipment | 10-20% | **Note** (a) Where leasehold property has a remaining useful life of less than 15 years, costs of adaptation and installed equipment are depreciated over the remaining life of the lease. Depreciation rates, methods and the residual values underlying the calculation of depreciation of items of property, plant and equipment are kept under review to take account of any change in circumstances. When deciding on depreciation rates and methods, the principal factors the Group takes into account are the expected rate of technological developments and expected market requirements for, and the expected pattern of usage of, the assets. When reviewing residual values, the Group estimates the amount that it would currently obtain for the disposal of the asset after deducting the estimated cost of disposal if the asset were already of the age and condition expected at the end of its useful economic life. No depreciation is provided on freehold land, although, in common with all long-lived assets, it is subject to impairment testing, if deemed appropriate. Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised in the income statement. **14. Intangible assets** **Goodwill** Goodwill arises on the acquisition of subsidiary and associated entities and joint ventures, and represents the excess of the fair value of the purchase consideration and direct costs of making the acquisition, over the fair value of the Group’s share of the assets acquired, and the liabilities and contingent liabilities assumed on the date of the acquisition. For the purpose of calculating goodwill, fair values of acquired assets, liabilities and contingent liabilities are determined by reference to market values or by discounting expected future cash flows to present value. This discounting is either performed using market rates or by using risk-free rates and risk-adjusted expected future cash flows. Goodwill is capitalised and reviewed annually for impairment, or more frequently when there are indications that impairment may have occurred. Goodwill is allocated to cash-generating units for the purpose of impairment testing. Goodwill on acquisitions of associates and joint ventures is included in the amount of the investment. Gains and losses on the disposal of an entity include the carrying amount of the goodwill relating to the entity sold. The carrying amount of goodwill in the UK GAAP balance sheet as at 31st December 2003 has been brought forward without adjustment on transition to IFRS. **Computer software** Computer software is stated at cost, less amortisation and provisions for impairment, if any. The identifiable and directly associated external and internal costs of acquiring and developing software are capitalised where the software is controlled by the Group, and where it is probable that future economic benefits that exceed its cost will flow from its use over more than one year. Costs associated with maintaining software are recognised as an expense when incurred. Capitalised computer software is amortised over three to five years. **Other intangible assets** Other intangible assets consist of brands, customer lists, licences and other contracts, core deposit intangibles, mortgage servicing rights and customer relationships. Other intangible assets are initially recognised when they are separable or arise from contractual or other legal rights, the cost can be measured reliably and, in the case of intangible assets not acquired in a business combination, where it is probable that future economic benefits attributable to the assets will flow from their use. The value of intangible assets which are acquired in a business combination is generally determined using income approach methodologies such as the discounted cash flow method and the relief from royalty method that estimate net cash flows attributable to an asset over its economic life and discount to present value using an appropriate rate of return based on the cost of equity adjusted for risk. Other intangible assets are stated at cost less amortisation and provisions for impairment, if any, and are amortised over their useful lives in a manner that reflects the pattern to which they contribute to future cash flows, generally over 4-25 years. **15. Impairment of property, plant and equipment and intangible assets** At each balance sheet date, or more frequently where events or changes in circumstances dictate, property, plant and equipment and intangible assets, are assessed for indications of impairment. If indications are present, these assets are subject to an impairment review. Goodwill is subject to an impairment review as at the balance sheet date each year. The impairment review comprises a comparison of the carrying amount of the asset with its recoverable amount: the higher of the asset’s or the cash-generating unit’s net selling price and its value in use. Net selling price is calculated by reference to the amount at which the asset could be disposed of in a binding sale agreement in an arm’s length transaction evidenced by an active market or recent transactions for similar assets. Value in use is calculated by discounting the expected future cash flows obtainable as a result of the asset’s continued use, including those resulting from its ultimate disposal, at a market based discount rate on a pre-tax basis. The carrying values of fixed assets and goodwill are written down by the amount of any impairment and this loss is recognised in the income statement in the period in which it occurs. A previously recognised impairment loss relating to a fixed asset may be reversed in part or in full when a change in circumstances leads to a change in the estimates used to determine the fixed asset’s recoverable amount. The carrying amount of the fixed asset will only be increased up to the amount that it would have been had the original impairment not been recognised. Impairment losses on goodwill are not reversed. For the purpose of conducting impairment reviews, cash-generating units are the lowest level at which management monitors the return on investment on assets. *** ## Accounts Barclays Bank PLC ### Accounting policies **16. Financial guarantees** Financial guarantee contracts are contracts that require the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due in accordance with the terms of a debt instrument. Such financial guarantees are given to banks, financial institutions and other bodies on behalf of customers to secure loans, overdrafts and other banking facilities (‘facility guarantees’), and to other parties in connection with the performance of customers under obligations related to contracts, advance payments made by other parties, tenders, retentions and the payment of import duties. Financial guarantees are initially recognised in the financial statements at fair value on the date that the guarantee was given. Other than where the fair value option is applied, subsequent to initial recognition, the bank’s liabilities under such guarantees are measured at the higher of the initial measurement, less amortisation calculated to recognise in the income statement the fee income earned over the period, and the best estimate of the expenditure required to settle any financial obligation arising as a result of the guarantees at the balance sheet date. Any increase in the liability relating to guarantees is taken to the income statement in Provisions for undrawn contractually committed facilities and guarantees provided. Any liability remaining is recognised in the income statement when the guarantee is discharged, cancelled or expires. **17. Issued debt and equity securities** Issued financial instruments or their components are classified as liabilities where the contractual arrangement results in the Group having a present obligation to either deliver cash or another financial asset to the holder, to exchange financial instruments on terms that are potentially unfavourable or to satisfy the obligation otherwise than by the exchange of a fixed amount of cash or another financial asset for a fixed number of equity shares. Issued financial instruments, or their components, are classified as equity where they meet the definition of equity and confer on the holder a residual interest in the assets of the company. The components of issued financial instruments that contain both liability and equity elements are accounted for separately with the equity component being assigned the residual amount after deducting from the instrument as a whole the amount separately determined as the fair value of the liability component. Financial liabilities, other than trading liabilities and financial liabilities designated at fair value, are carried at amortised cost using the effective interest method as set out in policy 6. Derivatives embedded in financial liabilities that are not designated at fair value are accounted for as set out in accounting policy 12. Equity instruments, including share capital, are initially recognised at net proceeds, after deducting transaction costs and any related income tax. Dividend and other payments to equity holders are deducted from equity, net of any related tax. **18. Share capital** **Share issue costs** Incremental costs directly attributable to the issue of new shares or options including those issued on the acquisition of a business are shown in equity as a deduction, net of tax, from the proceeds. **Dividends on ordinary shares** Dividends on ordinary shares are recognised in equity in the period in which they are paid or, if earlier, approved by the Barclays Bank PLC (the Bank) shareholders. **Treasury shares** Where the Bank or any member of the Group purchases the Bank’s share capital, the consideration paid is deducted from shareholders’ equity as treasury shares until they are cancelled. Where such shares are subsequently sold or reissued, any consideration received is included in shareholders’ equity. **19. Insurance contracts and investment contracts** The Group offers wealth management, term assurance, annuity, property and payment protection insurance products to customers that take the form of long and short term insurance contracts. The Group classifies its wealth management and other products as insurance contracts where these transfer significant insurance risk, generally where the benefits payable on the occurrence of an insured event are at least 5% more than the benefits that would be payable if the insured event does not occur. Barclays Wealth contracts that do not contain significant insurance risk or discretionary participation features are classified as investment contracts. Financial assets and liabilities relating to investment contracts, and assets backing insurance contracts are classified and measured as appropriate under IAS 39, ‘Financial Instruments: Recognition and Measurement’. **Long term insurance contracts** These contracts, insure events associated with human life (for example, death or survival) over a long duration. Premiums are recognised as revenue when they become payable by the contract holder. Claims and surrenders are accounted for when notified. Maturities on the policy maturity date and regular withdrawals are accounted for when due. A liability for contractual benefits that are expected to be incurred in the future is recorded when the premiums are recognised, based on the expected discounted value of the benefit payments and directly related administration costs, less the expected discounted value of the future premiums that would be required to meet the benefits and other expenses. The calculation of the liability contains assumptions regarding mortality, maintenance expenses and investment income. Liabilities under unit linked life insurance contracts (such as endowment policies) in addition reflect the value of assets held within unitised investment pools. **Short term insurance contracts** Under its payment protection insurance products the Group is committed to paying benefits to the policyholder rather than forgiving interest or principal on the occurrence of an insured event, such as unemployment, sickness, or injury. Property insurance contracts mainly compensate the policyholders for damage to their property or for the value of property lost. Premiums are recognised as revenue proportionally over the period of the coverage. Claims and claims handling costs are charged to income as incurred, based on the estimated liability for compensation owed to policyholders arising from events that have occurred up to the balance sheet date even if they have not yet been reported to the Group, based on assessments of individual cases reported to the Group and statistical analyses for the claims incurred but not reported. **Deferred acquisition costs (DAC)** Commissions and other costs that are related to securing new insurance and investment contracts are capitalised and amortised over the estimated lives of the relevant contracts. **Deferred Income Liability** Fees that are designed to recover commissions and other costs related to either securing new insurance and investment contracts or renewing existing investment contracts are included as a liability and amortised over the estimated life of the contract. **Value of business acquired** On acquisition of a portfolio of contracts, such as through the acquisition of a subsidiary, the Group recognises an intangible asset *** ## Accounts Barclays Bank PLC ### Accounting policies representing the value of business acquired (‘VOBA’), representing the future profits embedded in acquired insurance contracts and investment contracts with a discretionary participation feature. The asset is amortised over the remaining terms of the acquired contracts. **Liability adequacy test** Liability adequacy tests are performed at each balance sheet date to ensure the adequacy of contract liabilities net of DAC and VOBA assets. Current best estimates of future contractual cash flows, claims handling and administration costs, and investment returns from the assets backing the liabilities are taken into account in the tests. Where a deficiency is highlighted by the test, DAC and VOBA assets are written off first, and insurance liabilities increased when these are written off in full. Any deficiency is immediately recognised in the income statement. **Reinsurance** Short and long-term insurance business is ceded to reinsurers under contracts to transfer part or all of one or more of the following risks: mortality, investment and expenses. All such contracts are dealt with as insurance contracts. The benefits to which the Group is entitled under its reinsurance contracts are recognised as reinsurance assets. The Group assesses reinsurance assets at each balance sheet date. If there is objective evidence of impairment, the carrying amount of the reinsurance asset is reduced accordingly resulting in a charge to the income statement. **20. Leases** **Lessor** Assets leased to customers under agreements, which transfer substantially all the risks and rewards of ownership, with or without ultimate legal title, are classified as finance leases. When assets are held subject to a finance lease, the present value of the lease payments, discounted at the rate of interest implicit in the lease, is recognised as a receivable. The difference between the total payments receivable under the lease and the present value of the receivable is recognised as unearned finance income, which is allocated to accounting periods under the pre-tax net investment method to reflect a constant periodic rate of return. Assets leased to customers under agreements which do not transfer substantially all the risks and rewards of ownership are classified as operating leases. The leased assets are included within property, plant and equipment on the Group’s balance sheet and depreciation is provided on the depreciable amount of these assets on a systematic basis over their estimated useful lives. Lease income is recognised on a straight-line basis over the period of the lease unless another systematic basis is more appropriate. **Lessee** The leases entered into by the Group are primarily operating leases. Operating lease rentals payable are recognised as an expense in the income statement on a straight-line basis over the lease term unless another systematic basis is more appropriate. **21. Employee benefits** The Group provides employees worldwide with post retirement benefits mainly in the form of pensions. The Group operates a number of pension schemes which may be funded or unfunded and of a defined contribution or defined benefit nature. In addition, the Group contributes, according to local law in the various countries in which it operates, to Governmental and other plans which have the characteristics of defined contribution plans. For defined benefit schemes, actuarial valuation of each of the scheme’s obligations using the projected unit credit method and the fair valuation of each of the scheme’s assets are performed annually, using the assumptions set out in Note 35. The difference between the fair value of the plan assets and the present value of the defined benefit obligation at the balance sheet date, adjusted for any historic unrecognised actuarial gains or losses and past service cost, is recognised as a liability in the balance sheet. An asset, arising for example, as a result of past over funding or the performance of the plan investments, is recognised to the extent that it does not exceed the present value of future contribution holidays or refunds of contributions. Cumulative actuarial gains and losses in excess of the greater of 10% of the assets or 10% of the obligations of the plan are recognised in the income statement over the remaining average service lives of the employees of the related plan, on a straight-line basis. For defined contribution schemes, the Group recognises contributions due in respect of the accounting period in the income statement. Any contributions unpaid at the balance sheet date are included as a liability. The Group also provides healthcare to certain retired employees, which are accrued as a liability in the financial statements over the period of employment, using a methodology similar to that for defined benefit pensions plans. Short-term employee benefits, such as salaries, paid absences, and other benefits, are accounted for on an accruals basis over the period which employees have provided services in the year. Bonuses are recognised to the extent that the Group has a present obligation to its employees that can be measured reliably. All expenses related to employee benefits are recognised in the income statement in staff costs, which is included within operating expenses. **22. Share-based payments to employees** The Group engages in equity settled share-based payment transactions in respect of services received from certain of its employees. The fair value of the services received is measured by reference to the fair value of the shares or share options granted on the date of the grant. The cost of the employee services received in respect of the shares or share options granted is recognised in the income statement over the period that the services are received, which is the vesting period. The fair value of the options granted is determined using option pricing models, which take into account the exercise price of the option, the current share price, the risk free interest rate, the expected volatility of the share price over the life of the option and other relevant factors. Except for those which include terms related to market conditions, vesting conditions included in the terms of the grant are not taken into account in estimating fair value. Non-market vesting conditions are taken into account by adjusting the number of shares or share options included in the measurement of the cost of employee services so that ultimately, the amount recognised in the income statement reflects the number of vested shares or share options. Where vesting conditions are related to market conditions, the charges for the services received are recognised regardless of whether or not the market related vesting condition is met, provided that the non-market vesting conditions are met. **23. Provisions** Provisions are recognised for present obligations arising as consequences of past events where it is more likely than not that a transfer of economic benefit will be necessary to settle the obligation, and it can be reliably estimated. When a leasehold property ceases to be used in the business or a demonstrable commitment has been made to cease to use a property where the costs exceed the benefits of the property, provision is made, where the unavoidable costs of the future obligations relating to the lease are expected to exceed anticipated rental income and other benefits. The net costs are discounted using market rates of interest to reflect the long-term nature of the cash flows. Provision is made for the anticipated cost of restructuring, including redundancy costs when an obligation exists. An obligation exists when *** ## Accounts Barclays Bank PLC ### Accounting policies the Group has a detailed formal plan for restructuring a business and has raised valid expectations in those affected by the restructuring by starting to implement the plan or announcing its main features. The provision raised is normally utilised within nine months. Contingent liabilities are possible obligations whose existence will be confirmed only by uncertain future events or present obligations where the transfer of economic benefit is uncertain or cannot be reliably measured. Contingent liabilities are not recognised but are disclosed unless they are remote. **24. Taxes, including deferred taxes** Income tax payable on taxable profits (‘current tax’), is recognised as an expense in the period in which the profits arise. Income tax recoverable on tax allowable losses is recognised as an asset only to the extent that it is regarded as recoverable by offset against current or future taxable profits. Deferred income tax is provided in full, using the liability method, on temporary timing differences arising from the differences between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred income tax is determined using tax rates and legislation enacted or substantially enacted by the balance sheet date and is expected to apply when the deferred tax asset is realised or the deferred tax liability is settled. Deferred and current tax assets and liabilities are only offset when they arise in the same tax reporting group and where there is both the legal right and the intention to settle on a net basis or to realise the asset and settle the liability simultaneously. **25. Segment reporting** Business segments are distinguishable components of the Group that provide products or services that are subject to risks and rewards that are different to those of other business segments. Geographical segments provide products or services within a particular economic environment that is subject to risks and rewards that are different to those of components operating in other economic environments. Business segments are the primary reporting segments. Group costs are allocated to segments on a reasonable and consistent basis. Transactions between segments are generally accounted for in accordance with Group policies as if the segment were a stand alone business with intra-segment revenue and costs being eliminated in Head office. The analyses by geographical segment is based on the location of the customer. **26. Cash and cash equivalents** For the purposes of the cash flow statement, cash comprises cash on hand and demand deposits, and cash equivalents comprise highly liquid investments that are convertible into cash with an insignificant risk of changes in value with original maturities of less than 3 months. Trading balances, repos and reverse repos are not considered to be part of cash equivalents. **27. Trust activities** The Group commonly acts as trustees and in other fiduciary capacities that result in the holding or placing of assets on behalf of individuals, trusts, retirement benefit plans and other institutions. These assets and income arising thereon are excluded from these financial statements, as they are not assets of the Group. *** ## Accounts Barclays Bank PLC ### Accounting presentation **Changes in accounting presentation** In order to provide more relevance to users and to enhance the comparability of its financial statement presentation, the Group has reformatted the income statement, the balance sheet, the statement of cash flows and certain notes to the accounts, including the presentation of discrete notes that contain information regarding securitisations and leasing disclosed elsewhere in the accounts for 2005. Where appropriate, comparative figures have been re-presented to conform with the current year presentation. Previously reported amounts of assets, liabilities, equity, profits and changes in cash and cash equivalents have not been affected by the changes. Changes in presentation affecting operating cash flows in 2005 have been disclosed in Note 43. **Future accounting developments** IFRS 7 (‘Financial Instruments Disclosures’) and an amendment to IAS 1 (‘Presentation of Financial Statements’) on capital disclosures were issued by the IASB in August 2005 for application in accounting periods beginning on or after 1st January 2007 and have been adopted by the European Commission. The new or revised disclosures will be adopted by the Group for reporting in 2007. The following International Financial Reporting Interpretations Committee (IFRIC) interpretations issued during 2005 and 2006 which first apply to accounting periods beginning on or after 1st January 2007 are not expected to result in any changes to the Group’s accounting policies: - Interpretation 7 – Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies - Interpretation 8 – Scope of IFRS 2 - Interpretation 9 – Reassessment of Embedded Derivatives - Interpretation 10 – Interim Financial Reporting and Impairment Consideration will be given during 2007 to the implications, if any, of the following IFRIC interpretations issued during 2006 which would first apply to the Group accounting period beginning on 1st January 2008: - IFRIC 11 IFRS 2 – Group and Treasury Share Transactions - IFRIC 12 Service Concession Arrangements IFRS 8 Operating Segments was issued in November 2006 and would first be required to be applied to the Group accounting period beginning on 1st January 2009. The standard replaces IAS 14 Segmental Reporting and would align operating segmental reporting with segments reported to senior management as well as requiring amendments and additions to the existing segmental reporting disclosures. The Group is considering the advantages that permitted early adoption in 2007 may make to the transparency of the segmental disclosures. **Acquisitions** **2006:** On 1st November 2006, Barclays Bank PLC (‘Barclays’) acquired the US mortgage servicing business of HomEq Servicing Corporation from Wachovia Corporation. **2005:** On 1st June 2005, Barclays Asset and Sales Finance (‘BASF’) acquired a 51% share and controlling stake in Fiat’s Iveco Vehicle Finance Business. The transaction will expand BASF’s commercial vehicle expertise. On 30th June 2005, EnterCard, the joint venture between Barclays Bank PLC and FöreningsSparbanken (also known as Swedbank), which was announced on 4th February 2005, began operations. Barclays Bank PLC has a 50% economic interest in the joint venture. EnterCard provides credit cards in the Nordic market, initially in Sweden and Norway. On 1st July 2005, Barclays acquired the wealth business of ING Securities Bank (France) consisting of ING Ferri and ING Private Banking. On 9th May 2005, Barclays announced the terms of a recommended acquisition of a majority stake in Absa Group Limited (‘Absa’). Barclays has consolidated Absa from 27th July 2005. **Disposals** **2006:** On 1st January 2006, Barclays completed the sale of the Barclays South African branch business to Absa Group Limited. This consists of the Barclays Capital South African operations and Corporate and Business Banking activities previously carried out by the South African branch of International Retail and Commercial Banking – excluding Absa, together with the associated assets and liabilities. On 25th July 2006, BASF disposed of its interest in its motor vehicle contract hire business, Appleyard Finance Holdings Limited. On 31st August 2006, Barclays disposed of Bankhaus Wolbern which was formerly part of Absa. On 22nd December 2006, Barclays disposed of its interest in FirstCaribbean International Bank to Canadian Imperial Bank of Commerce. On 31st December 2006, BASF disposed of its European Vendor Finance business, including Barclays Industrie Bank GmbH and Barclays Technology Finance Ltd, to CIT Group. **Recent developments** On 19th January 2007, Barclays announced that it had entered into an agreement to purchase EquiFirst Corporation, the non-prime mortgage origination business of Regions Financial Corporation. Completion is expected in the first half of 2007, subject to the receipt of the required licences and applicable regulatory approval. On 8th February 2007, Barclays completed the acquisition of Indexchange Investment AG, Germany’s leading provider of exchange traded funds, from Bayerische Hypo-und Vereinsbank. The transaction was announced in November 2006. On 28th February 2007, Barclays completed the acquisition of approximately 96% of the share capital of Nile Bank in Uganda. The transaction was announced in December 2006. *** ## Accounts Barclays Bank PLC ### Consolidated income statement For the year ended 31st December | | | The Group | | | --- | --- | --- | --- | | | Notes | 2006 £m | 2005 £m | | **Continuing operations** | | | | | Interest income | 2 | 21,805 | 17,232 | | Interest expense | 2 | (12,662) | (9,157) | | **Net interest income** | | **9,143** | **8,075** | | Fee and commission income | 3 | 8,005 | 6,430 | | Fee and commission expense | 3 | (828) | (725) | | **Net fee and commission income** | | **7,177** | **5,705** | | Net trading income | 4 | 3,632 | 2,321 | | Net investment income | 4 | 962 | 858 | | **Principal transactions** | | **4,594** | **3,179** | | Net premiums from insurance contracts | 5 | 1,060 | 872 | | Other income | 6 | 257 | 178 | | **Total income** | | **22,231** | **18,009** | | Net claims and benefits incurred on insurance contracts | 5 | (575) | (645) | | **Total income net of insurance claims** | | **21,656** | **17,364** | | Impairment charges | 7 | (2,154) | (1,571) | | **Net income** | | **19,502** | **15,793** | | Staff costs | 8 | (8,169) | (6,318) | | Administration and general expenses | 9 | (3,914) | (3,768) | | Depreciation of property, plant and equipment | 25 | (455) | (362) | | Amortisation of intangible assets | 24 | (136) | (79) | | **Operating expenses** | | **(12,674)** | **(10,527)** | | Share of post-tax results of associates and joint ventures | 21 | 46 | 45 | | Profit on disposal of subsidiaries, associates and joint ventures | | 323 | – | | **Profit before tax** | | **7,197** | **5,311** | | Tax | 10 | (1,941) | (1,439) | | **Profit after tax** | | **5,256** | **3,872** | | Profit attributable to minority interests | 39 | 342 | 177 | | Profit attributable to equity holders | | 4,914 | 3,695 | | | | **5,256** | **3,872** | The Board of Directors approved the accounts set out on pages 16 to 130 on 8th March 2007. The accompanying notes form an integral part of the accounts. *** ## Balance sheets As at 31st December | | | The Group | | The Bank | | | --- | --- | --- | --- | --- | --- | | | Notes | 2006 £m | 2005 £m | 2006 £m | 2005 £m | | **Assets** | | | | | | | Cash and balances at central banks | | 6,795 | 3,506 | 4,411 | 973 | | Items in the course of collection from other banks | | 2,408 | 1,901 | 2,312 | 1,848 | | Trading portfolio assets | 11 | 177,884 | 155,730 | 120,975 | 108,257 | | Financial assets designated at fair value: | | | | | | | – held on own account | 12 | 31,799 | 12,904 | 23,188 | 11,899 | | – held in respect of linked liabilities to customers under investment contracts | 12 | 82,798 | 83,193 | – | – | | Derivative financial instruments | 13 | 138,353 | 136,823 | 149,439 | 142,624 | | Loans and advances to banks | 14 | 30,926 | 31,105 | 23,867 | 23,915 | | Loans and advances to customers | 15 | 282,300 | 268,896 | 279,820 | 249,214 | | Available for sale financial investments | 17 | 51,952 | 53,703 | 31,564 | 49,025 | | Reverse repurchase agreements and cash collateral on securities borrowed | 18 | 174,090 | 160,398 | 180,625 | 153,419 | | Other assets | 19 | 5,850 | 4,734 | 3,349 | 1,904 | | Current tax assets | 20 | 557 | – | 1,193 | – | | Investments in associates and joint ventures | 21 | 228 | 546 | 97 | 410 | | Investments in subsidiaries | 22 | – | – | 14,317 | 13,680 | | Goodwill | 23 | 6,092 | 6,022 | 3,591 | 3,591 | | Intangible assets | 24 | 1,215 | 1,269 | 347 | 116 | | Property, plant and equipment | 25 | 2,492 | 2,754 | 1,358 | 1,517 | | Deferred tax assets | 20 | 764 | 686 | 1,104 | 1,056 | | **Total assets** | | **996,503** | **924,170** | **841,557** | **763,448** | | **Liabilities** | | | | | | | Deposits from banks | 26 | 79,562 | 75,127 | 100,572 | 89,559 | | Items in the course of collection due to other banks | | 2,221 | 2,341 | 2,204 | 2,550 | | Customer accounts | 27 | 256,754 | 238,684 | 282,985 | 219,876 | | Trading portfolio liabilities | 11 | 71,874 | 71,564 | 43,479 | 47,805 | | Financial liabilities designated at fair value | 28 | 53,987 | 33,385 | 51,236 | 46,947 | | Liabilities to customers under investment contracts | 12 | 84,637 | 85,201 | – | – | | Derivative financial instruments | 13 | 140,697 | 137,971 | 147,382 | 140,529 | | Debt securities in issue | 29 | 111,137 | 103,328 | 53,023 | 56,992 | | Repurchase agreements and cash collateral on securities lent | 18 | 136,956 | 121,178 | 109,518 | 114,555 | | Other liabilities | 30 | 10,337 | 11,131 | 16,752 | 13,738 | | Balances due to Barclays PLC | | – | – | – | 4 | | Current tax liabilities | 20 | 1,020 | 747 | 512 | 138 | | Insurance contract liabilities, including unit-linked liabilities | 31 | 3,878 | 3,767 | – | – | | Subordinated liabilities | 32 | 13,786 | 12,463 | 13,460 | 12,143 | | Deferred tax liabilities | 20 | 282 | 700 | – | – | | Provisions | 33 | 462 | 517 | 343 | 328 | | Retirement benefit liabilities | 35 | 1,807 | 1,823 | 1,584 | 1,647 | | **Total liabilities** | | **969,397** | **899,927** | **823,050** | **746,811** | | **Shareholders’ equity** | | | | | | | Called up share capital | 36 | 2,363 | 2,348 | 2,363 | 2,348 | | Share premium account | 36 | 9,452 | 8,882 | 9,452 | 8,882 | | Other reserves | 37 | (484) | 483 | (52) | 382 | | Other shareholders’ equity | 38 | 2,534 | 2,490 | 2,598 | 2,554 | | Retained earnings | 37 | 11,556 | 8,462 | 4,146 | 2,471 | | **Shareholders’ equity excluding minority interests** | | **25,421** | **22,665** | **18,507** | **16,637** | | Minority interests | 39 | 1,685 | 1,578 | – | – | | **Total shareholders’ equity** | | **27,106** | **24,243** | **18,507** | **16,637** | | **Total liabilities and shareholders’ equity** | | **996,503** | **924,170** | **841,557** | **763,448** | The accompanying notes form an integral part of the accounts. Marcus Agius, Chairman John Varley, Group Chief Executive Naguib Kheraj, Group Finance Director *** ## Accounts Barclays Bank PLC ### Statements of recognised income and expense | | The Group | | The Bank | | | --- | --- | --- | --- | --- | | | 2006 £m | 2005 £m | 2006(a) £m | 2005(a) £m | | **Available for sale reserve:** | | | | | | – Net gains/(losses) from changes in fair value | 107 | (217) | (56) | (116) | | – Losses transferred to net profit due to impairment | 86 | – | 85 | – | | – Net gains transferred to net profit on disposal | (327) | (120) | (40) | (99) | | – Net losses transferred to net profit due to fair value hedging | 14 | 260 | – | – | | **Cash flow hedging reserve:** | | | | | | – Net losses from changes in fair value | (437) | (50) | (611) | 94 | | – Net gains transferred to net profit | (50) | (69) | (67) | (103) | | Currency translation differences arising | (781) | 300 | (47) | – | | Tax | 253 | 50 | 397 | (25) | | Other | 25 | (102) | 71 | (39) | | **Amounts included directly in equity** | **(1,110)** | **52** | **(268)** | **(288)** | | **Profit after tax** | **5,256** | **3,872** | **3,812** | **2,149** | | **Total recognised income and expense for the year** | **4,146** | **3,924** | **3,544** | **1,861** | | **Attributable to:** | | | | | | Equity holders | 4,132 | 3,659 | 3,544 | 1,861 | | Minority interests | 14 | 265 | – | – | | | **4,146** | **3,924** | **3,544** | **1,861** | The accompanying notes form an integral part of the accounts. **Note** (a) As permitted by section 230(3) of the Companies Act 1985 an income statement for the parent company has not been presented. *** ## Accounts Barclays Bank PLC ### Cash flow statements | | The Group | | The Bank | | | --- | --- | --- | --- | --- | | | 2006 £m | 2005 £m | 2006(a) £m | 2005(a) £m | | **Reconciliation of profit before tax to net cash flows from operating activities:** | | | | | | Profit before tax | 7,197 | 5,311 | 4,235 | 2,652 | | **Adjustment for non-cash items:** | | | | | | Allowance for impairment | 2,154 | 1,571 | 1,798 | 1,408 | | Depreciation and amortisation and impairment of intangibles | 612 | 450 | 321 | 246 | | Other provisions, including pensions | 558 | 654 | 503 | 528 | | Net profit from associates and joint ventures | (46) | (45) | – | – | | Net profit on disposal of investments and property, plant and equipment | (778) | (530) | (425) | (115) | | Net profit from disposal of associates and joint ventures | (263) | – | (263) | – | | Net profit from disposal of subsidiaries | (60) | – | (60) | – | | Other non-cash movements | 1,661 | 1,505 | 450 | (2,587) | | **Changes in operating assets and liabilities:** | | | | | | Net increase in loans and advances to banks and customers | (27,385) | (63,177) | (57,987) | (92,599) | | Net increase in deposits and debt securities in issue | 46,944 | 67,012 | 66,697 | 56,732 | | Net decrease/(increase) in derivative financial instruments | 1,196 | 841 | 38 | (1,626) | | Net increase in trading portfolio assets | (18,333) | (42,585) | (8,897) | (3,345) | | Net increase/(decrease) in trading liabilities | 310 | 9,888 | (4,326) | 2,628 | | Net decrease/(increase) in financial investments | 1,538 | 27,129 | (7,000) | 30,073 | | Net (increase)/decrease in other assets | (1,527) | (411) | (1,891) | 5,276 | | Net (decrease)/increase in other liabilities | (1,580) | (2,852) | 2,119 | 14,838 | | Tax paid | (2,141) | (1,082) | (954) | (633) | | **Net cash from operating activities** | **10,057** | **3,679** | **(5,642)** | **13,476** | | Purchase of available for sale investments | (47,109) | (53,626) | (26,064) | (44,539) | | Proceeds from sale or redemption of available for sale investments | 46,069 | 51,114 | 41,315 | 38,584 | | Purchase of intangible assets | (212) | (91) | (177) | (55) | | Purchase of property, plant and equipment | (654) | (588) | (399) | (311) | | Proceeds of disposal of property, plant and equipment | 786 | 98 | 644 | 70 | | Acquisitions, net of cash acquired | (248) | (2,115) | (248) | (64) | | Disposal of subsidiaries, net of cash disposed | (15) | – | 10 | – | | Increase in investment in subsidiaries | (432) | (160) | (432) | (160) | | Decrease in investment in subsidiaries | 44 | 49 | 44 | 49 | | Acquisition of associates and joint ventures | (162) | (176) | (6) | (53) | | Disposal of associates and joint ventures | 739 | 40 | 582 | 9 | | Other cash flows associated with investing activities | 17 | 23 | – | – | | Investment in subsidiaries | – | – | (174) | (3,278) | | **Net cash used in investing activities** | **(1,177)** | **(5,432)** | **15,095** | **(9,748)** | | Dividends paid | (2,373) | (2,325) | (2,249) | (2,231) | | Proceeds of borrowings and issuance of debt securities | 2,493 | 1,179 | 2,485 | 1,067 | | Repayments of borrowings and redemption of debt securities | (366) | (464) | (361) | (290) | | Issue of shares and other equity instruments | 585 | 2,383 | 585 | 2,383 | | Repurchases of shares and other equity instruments | – | – | – | – | | Net purchase of treasury shares | – | – | – | – | | Net issues of shares to minority interests | 226 | 20 | – | – | | **Net cash from financing activities** | **565** | **793** | **460** | **929** | | Exchange loss/(gain) on foreign currency cash and cash equivalents | 552 | (237) | 144 | (67) | | **Net increase/(decrease) in cash and cash equivalents** | **9,997** | **(1,197)** | **10,057** | **4,590** | | Cash and cash equivalents at beginning of year | 20,405 | 21,602 | 13,882 | 9,292 | | **Cash and cash equivalents at end of year** | **30,402** | **20,405** | **23,939** | **13,882** | The accompanying notes form an integral part of the accounts. **Note** (a) As permitted by section 230(3) of the Companies Act 1985 an income statement for the parent company has not been presented. *** ## Notes to the accounts ### 1 Dividends Dividends are paid to enable Barclays PLC to fund its dividends to its shareholders. Dividends paid in the year were: | | 2006 £m | 2005 £m | | --- | --- | --- | | **On ordinary shares** | | | | Final dividend | 730 | 1,017 | | Interim dividend | 1,234 | 995 | | **Dividends** | **1,964** | **2,012** | The 2006 final dividend of £730m relates to the cash payment of the final dividend declared in 2005, paid in April 2006. The 2005 final dividend of £1,017m relates to the cash payment of the final dividend declared in 2004, paid in April 2005. Dividends per ordinary share for 2006 were 84.3p (2005: 82.5p). Dividends paid on the 4.75% €100 preference shares amounted to £329.86 per share (2005: £nil). Dividends paid on the 4.875% €100 preference shares amounted to £327.81 per share (2005: £340.66). Dividends paid on the £100 preference shares amounted to £600.00 per share (2005: £289.32). Dividends paid on the US$100 preference shares amounted to £330.38 per share (2005: £189.61). Dividends paid on the US$0.25 preference shares amounted to 55.4p per share (2005: nil). Dividends paid on preference shares amounted to £174m (2005: £74m). Dividends paid on other equity instruments as detailed in Note 38 amounted to £151m (2005: £143m). ### 2 Net interest income | | The Group | | | --- | --- | --- | | | 2006 £m | 2005 £m | | Cash and balances with central banks | 91 | 9 | | Financial investments | 2,811 | 2,272 | | Loans and advances to banks | 903 | 690 | | Loans and advances to customers | 16,290 | 12,944 | | Other | 1,710 | 1,317 | | **Interest income** | **21,805** | **17,232** | | Deposits from banks | (2,819) | (2,056) | | Customer accounts | (3,076) | (2,715) | | Debt securities in issue | (5,282) | (3,268) | | Subordinated liabilities | (777) | (605) | | Other | (708) | (513) | | **Interest expense** | **(12,662)** | **(9,157)** | | **Net interest income** | **9,143** | **8,075** | Interest income includes £98m (2005: £76m) accrued on impaired loans. Included in net interest income is hedge ineffectiveness as detailed in Note 13. *** ## Notes to the accounts ### 3 Net fee and commission income | | The Group | | | --- | --- | --- | | | 2006 £m | 2005 £m | | **Fee and commission income** | | | | Brokerage fees | 70 | 64 | | Investment management fees | 1,535 | 1,250 | | Securities lending | 185 | 151 | | Securities trading and investment activity fees | 1,790 | 1,465 | | Banking and credit related fees and commissions | 6,031 | 4,805 | | Foreign exchange commission | 184 | 160 | | **Fee and commission income** | **8,005** | **6,430** | | **Fee and commission expense** | **(828)** | **(725)** | | **Net fee and commission income** | **7,177** | **5,705** | ### 4 Principal transactions | | The Group | | | --- | --- | --- | | | 2006 £m | 2005 £m | | Rates related business | 2,866 | 1,732 | | Credit related business | 766 | 589 | | **Net trading income** | **3,632** | **2,321** | | Net gain from disposal of available for sale assets/investment securities | 307 | 120 | | Dividend income on equity investments | 15 | 22 | | Net gain from financial instruments designated at fair value | 447 | 389 | | Income from assets backing insurance policies | n/a | n/a | | Other investment income | 193 | 327 | | **Net investment income** | **962** | **858** | | **Principal transactions** | **4,594** | **3,179** | Net trading income includes the profits and losses arising both on the purchase and sale of trading instruments and from the revaluation to market value, together with the interest income earned from these instruments and the related funding cost. The gain/loss from disposal of available for sale assets was calculated on an instrument by instrument basis. Of the total net trading income, £947m (2005: £498m) was earned on securities and £480m (2005: £340m) was earned in foreign exchange dealings. Rates related business includes fixed income, foreign exchange, commodities, emerging markets, money markets sales, trading and research, prime services and equity products; Credit related business includes primary and secondary activities for loans and bonds for investment grade, high yield and emerging market credits, as well as hybrid capital products, asset based finance, commercial mortgage backed securities, credit derivatives, structured capital markets and large asset leasing. The net gain on financial assets designated at fair value included within principal transactions was £489m (2005: £391m) of which gains of £42m (2005: £2m gain) were included in net trading income and gains of £447m (2005: £389m) were included in net investment income. The net loss on financial liabilities designated at fair value included within principal transactions was £920m (2005: £666m) all of which was included within net trading income. *** ## Notes to the accounts ### 5 Insurance premiums and insurance claims and benefits | | The Group | | | --- | --- | --- | | | 2006 £m | 2005 £m | | Gross premiums from insurance contracts | 1,108 | 909 | | Premiums ceded to reinsurers | (48) | (37) | | **Net premiums from insurance contracts** | **1,060** | **872** | | | The Group | | | --- | --- | --- | | | 2006 £m | 2005 £m | | Gross claims and benefits incurred on insurance contracts | 588 | 694 | | Reinsurers’ share of claims incurred | (13) | (49) | | **Net claims and benefits incurred on insurance contracts** | **575** | **645** | ### 6 Other income | | The Group | | | --- | --- | --- | | | 2006 £m | 2005 £m | | Increase in fair value of assets held in respect of linked liabilities to customers under investment contracts | 7,417 | 9,234 | | Increase in liabilities to customers under investment contracts | (7,417) | (9,234) | | Property rentals | 55 | 54 | | Other income | 202 | 124 | | **Other income** | **257** | **178** | Included in other income are sub-lease payments of £18m (2005: £18m). Included in other income is a gain on reinsurance. *** ## Notes to the accounts ### 7 Impairment charges | | The Group | | | --- | --- | --- | | | 2006 £m | 2005 £m | | **Impairment charges on loans and advances** | | | | – New and increased impairment allowances | 2,722 | 2,129 | | – Releases | (389) | (333) | | – Recoveries | (259) | (222) | | Impairment charges on loans and advances | 2,074 | 1,574 | | **Other credit provisions** | | | | Release in respect of provision for undrawn contractually committed facilities and guarantees provided | (6) | (7) | | Impairment charges on loans and advances and credit provisions | 2,068 | 1,567 | | Impairment on available for sale assets | 86 | 4 | | **Impairment charges** | **2,154** | **1,571** | ### 8 Staff costs | | The Group | | | --- | --- | --- | | | 2006 £m | 2005 £m | | Salaries and accrued incentive payments | 6,635 | 5,036 | | Social security costs | 502 | 412 | | Pension costs – defined contribution plans | 128 | 76 | | Pension costs – defined benefit plans (Note 35) | 282 | 271 | | Other post-retirement benefits (Note 35) | 30 | 27 | | Other | 592 | 496 | | **Staff costs** | **8,169** | **6,318** | Included in salaries and accrued incentive payments for the Group is £640m (2005: £338m) arising from equity settled share-based payments, of which £78m (2005: £44m) is a charge related to options-based schemes. Also included is £6m (2005: £nil) arising from cash settled share-based payments. The average number of persons employed by the Group worldwide during the year, excluding agency staff, was 118,600 (2005: 92,800). *** ## Notes to the accounts ### 9 Administration and general expenses | | 2006 £m | 2005 £m | | --- | --- | --- | | Administrative expenses | 3,980 | 3,443 | | Impairment loss | | | | – property and equipment (Note 25) | 14 | – | | – intangible assets (Note 24) | 7 | 9 | | Operating lease rentals | 345 | 316 | | Gain on property disposals | (432) | – | | **Administration and general expenses** | **3,914** | **3,768** | **Auditors’ remuneration** | 2006 | Audit £m | Audit related £m | Taxation services £m | Other services £m | Total £m | | --- | --- | --- | --- | --- | --- | | Audit of the Group’s annual accounts | 7 | – | – | – | 7 | | **Other services:** | | | | | | | Fees payable for the audit of the Company’s associates pursuant to legislation | 11 | – | – | – | 11 | | Other services supplied pursuant to such legislation | 10 | 1 | – | – | 11 | | Other services relating to taxation | – | – | 6 | – | 6 | | Services relating to corporate finance transactions entered into or proposed to be entered into by or on behalf of the Company or any of its associates | – | – | – | 4 | 4 | | Other | – | 4 | – | 1 | 5 | | **Total auditor’s remuneration** | **28** | **5** | **6** | **5** | **44** | | 2005 | Audit £m | Audit related £m | Taxation services £m | Other services £m | Total £m | | --- | --- | --- | --- | --- | --- | | Audit of the Group’s annual accounts | 6 | – | – | – | 6 | | **Other services:** | | | | | | | Fees payable for the audit of the Company’s associates pursuant to legislation | 8 | – | – | – | 8 | | Other services supplied pursuant to such legislation | 1 | – | – | – | 1 | | Other services relating to taxation | – | – | 4 | – | 4 | | Services relating to corporate finance transactions entered into or proposed to be entered into by or on behalf of the Company or any of its associates | – | – | – | 3 | 3 | | Other | – | 7 | – | – | 7 | | **Total auditor’s remuneration** | **15** | **7** | **4** | **3** | **29** | The figures shown in the above table relate to fees paid to PricewaterhouseCoopers LLP and its associates. Fees paid to other auditors not associated with PricewaterhouseCoopers LLP in respect of the audit of the Company’s subsidiaries are £2m (2005: £3m). Fees payable for the audit of the Company’s associates pursuant to legislation comprises the fees for the statutory audit of the subsidiaries and associated pension schemes both inside and outside Great Britain and fees for the work performed by the associates of PricewaterhouseCoopers LLP in respect of the consolidated financial statements of the Company. The fees relating to the audit of the associated pension schemes were £0.3m (2005: £0.3m). Other services supplied pursuant to such legislation comprises services in relation to statutory and regulatory filings. This includes audit services for the review of the interim financial information under the Listing Rules of the UK listing authority, and for the first time in 2006, fees paid for preparation for reporting under Section 404 of the US Sarbanes-Oxley Act (Section 404). In addition, other services include Section 404 advisory, IFRS advisory, securitisations and services relating to the Absa acquisition. Taxation services include compliance services such as tax return preparation and advisory services such as consultation on tax matters, tax advice relating to transactions and other tax planning and advice. Services relating to corporate finance transactions comprise due diligence related to transactions and accounting consultations and audits in connection with such transactions. *** ## Notes to the accounts ### 10 Tax The charge for tax is based upon the standard UK corporation tax rate of 30% (2005: 30%) and comprises: | | The Group | | | --- | --- | --- | | | 2006 £m | 2005 £m | | **Current tax charge** | | | | Current year | 1,929 | 1,583 | | Adjustment for prior years | 8 | (59) | | **Total** | **1,937** | **1,524** | | **Deferred tax charge/(credit)** | | | | Origination and reversal of temporary differences | (16) | (7) | | Adjustment for prior years | 20 | (71) | | Change in tax rate | 4 | 3 | | Other | (4) | (10) | | **Total** | **4** | **(85)** | | **Tax charge** | **1,941** | **1,439** | | | The Group | | | --- | --- | --- | | | 2006 £m | 2005 £m | | **Current tax charge** | | | | United Kingdom | 1,138 | 1,013 | | Overseas | 799 | 511 | | **Total** | **1,937** | **1,524** | | **Deferred tax charge/(credit)** | | | | United Kingdom | 96 | (52) | | Overseas | (92) | (33) | | **Total** | **4** | **(85)** | | **Tax charge** | **1,941** | **1,439** | Available overseas tax credits for the Group of £515m (2005: £270m) have been applied to reduce UK tax in accordance with UK legislation. The tax for the year in 2006 and 2005 is lower than the standard rate of corporation tax in the UK of 30% (2005: 30%). The differences are set out below: | | The Group | | | --- | --- | --- | | | 2006 £m | 2005 £m | | **Profit before tax** | **7,197** | **5,311** | | Tax charge at standard UK corporation tax rate of 30% (2005: 30%) | 2,159 | 1,593 | | Adjustment for prior years | 28 | (130) | | Differing overseas tax rates | (17) | (35) | | Non-taxable gains and income (including amounts offset by previously unrecognised tax losses) | (393) | (138) | | Share-based payments | 27 | (12) | | Deferred tax assets not recognised | (4) | (7) | | Other non-allowable expenses | 141 | 168 | | **Overall tax charge** | **1,941** | **1,439** | | **Effective tax rate** | **27%** | **27%** | *** ## Notes to the accounts ### 11 Trading portfolio | | The Group | | The Bank | | | --- | --- | --- | --- | --- | | | 2006 £m | 2005 £m | 2006 £m | 2005 £m | | **Trading portfolio assets** | | | | | | Treasury and other eligible bills | 2,960 | 6,081 | 2,135 | 4,406 | | **Debt securities** | | | | | | United Kingdom government bonds | 4,986 | 4,786 | 4,622 | 4,786 | | Other government bonds | 46,845 | 46,426 | 32,598 | 33,478 | | Other mortgage and asset backed securities | 17,032 | 10,290 | 8,007 | 4,012 | | Bank and building society certificates of deposit | 14,159 | 15,837 | 14,159 | 15,812 | | Other issuers | 57,554 | 51,028 | 43,465 | 36,984 | | **Debt securities** | **140,576** | **128,367** | **102,851** | **95,072** | | **Equity securities** | **31,565** | **20,299** | **14,076** | **8,102** | | **Traded loans** | **1,843** | **408** | **976** | **100** | | **Physical commodity trading positions** | **940** | **575** | **937** | **577** | | **Trading portfolio assets** | **177,884** | **155,730** | **120,975** | **108,257** | | **Trading portfolio liabilities** | | | | | | Treasury and other eligible bills | (608) | (1,120) | (203) | (264) | | **Debt securities** | | | | | | United Kingdom government bonds | (6,889) | (7,784) | (6,889) | (7,784) | | Other government bonds | (44,950) | (44,601) | (30,473) | (32,801) | | Other mortgage and asset backed securities | (26) | (40) | (3) | (17) | | Bank and building society certificates of deposit | (113) | (45) | (113) | (45) | | Other issuers | (6,164) | (9,903) | (3,750) | (5,183) | | **Debt securities** | **(58,142)** | **(62,373)** | **(41,228)** | **(45,830)** | | **Equity securities** | **(12,697)** | **(8,071)** | **(1,621)** | **(1,711)** | | **Short positions in commodity contracts** | **(427)** | **–** | **(427)** | **–** | | **Trading portfolio liabilities** | **(71,874)** | **(71,564)** | **(43,479)** | **(47,805)** | *** ## Notes to the accounts ### 12 Financial assets designated at fair value **Held on own account** | | The Group | | The Bank | | | --- | --- | --- | --- | --- | | | 2006 £m | 2005 £m | 2006 £m | 2005 £m | | Loans and advances designated at fair value | 13,196 | 8,600 | 14,951 | 11,701 | | Debt securities designated at fair value | 12,100 | 171 | 8,237 | – | | Equity securities designated at fair value | 3,711 | 3,915 | – | 198 | | Other assets designated at fair value | 2,792 | 218 | – | – | | **Financial assets designated at fair value – held on own account** | **31,799** | **12,904** | **23,188** | **11,899** | **Credit risks on loans and advances designated at fair value** The maximum exposure to credit risk on loans and advances designated at fair value at 31st December 2006 by the Group was £13,196m (2005: £8,600m). The amount by which related credit derivatives and similar instruments mitigate the Group’s exposure to credit risk at 31st December 2006 was £28m (2005: £2,505m). The net gain attributable to changes in credit risk for loans and advances designated at fair value by the Group was £nil in 2006 (2005: £3m). The gains or losses on related credit derivatives was £nil for the year (2005: £nil). The cumulative net gain attributable to changes in credit risk for loans and advances designated at fair value since initial recognition by the Group is £3m (2005: £3m) at 31st December 2006. The cumulative change in fair value of related credit derivatives at 31st December 2006 is £nil (2005: £nil). The maximum exposure to credit risk on loans and advances designated at fair value at 31st December 2006 by the Bank was £10,358m (2005: £11,701m). The amount by which related credit derivatives and similar instruments mitigate the Bank’s exposure to credit risk at 31st December 2006 was £28m (2005: £2,505m). The net gain attributable to changes in credit risk for loans and advances designated at fair value by the Bank was £nil (2005: £nil) in 2006. The gains or losses on related credit derivatives was £nil (2005: £nil) for the year. The cumulative net gain attributable to changes in credit risk for loans and advances designated at fair value since initial recognition by the Bank is £nil (2005: £nil) at 31st December 2006. The cumulative change in fair value of related credit derivatives at 31st December 2006 is £nil (2005: £nil). Certain loans and advances designated at fair value are subject to securitisation. See Note 34. **Held in respect of linked liabilities to customers under investment contracts/liabilities arising from investment contracts** | | The Group | | The Bank | | | --- | --- | --- | --- | --- | | | 2006 £m | 2005 £m | 2006 £m | 2005 £m | | Financial assets designated at fair value held in respect of linked liabilities to customers under investment contracts | 82,798 | 83,193 | – | – | | Cash and bank balances within the portfolio | 1,839 | 2,008 | – | – | | **Assets held in respect of linked liabilities to customers under investment contracts** | **84,637** | **85,201** | **–** | **–** | | **Liabilities to customers under investment contracts** | **(84,637)** | **(85,201)** | **–** | **–** | A portion of the Group’s fund management business takes the legal form of insurance policies, under which legal title to the underlying investment is held by the Group, but the inherent risks and rewards in the investments are borne by the customer. In the normal course of business, the Group’s financial interest in such investments is restricted to fees for investment management services. Due to the nature of these contracts, the carrying value of the assets is always the same as the value of the liabilities and any change in the value of the assets results in an equal but opposite change in the value of the amounts due to the policyholders. In the balance sheet, the assets are included as ‘Financial assets designated at fair value – held in respect of linked liabilities to customers under investment contracts’. Cash balances within the portfolio have been included in the Group’s cash balances. The associated obligation to deliver the value of the investments to customers at their fair value on balance sheet date is included as ‘Liabilities to customers under investment contracts’. The increase/decrease in the value arising from the return on the investments and the corresponding increase/decrease in linked liabilities to customers is included in Note 6 Other income. *** ## Notes to the accounts ### 13 Derivative financial instruments **Financial instruments** The Group’s objectives and policies on managing the risks that arise in connection with derivatives, including the policies for hedging, are included in Note 52 to Note 56 under the headings ‘Financial Risks’, ‘Interest Rate Risk’, ‘Credit Risk’, ‘Currency Risk’ and ‘Liquidity Risk’. The notional amounts of certain types of financial instruments provide a basis for comparison with instruments recognised on the balance sheet but do not necessarily indicate the amounts of future cash flows involved or the current fair value of the instruments and, therefore, do not indicate the Group’s exposure to credit or price risks. The derivative instruments become favourable (assets) or unfavourable (liabilities) as a result of fluctuations in market rates or prices relative to their terms. The aggregate contractual or notional amount of derivative financial instruments on hand, the extent to which instruments are favourable or unfavourable and, thus the aggregate fair values of derivative financial assets and liabilities can fluctuate significantly. The fair value of a derivative contract represents the amount at which that contract could be exchanged in an arms-length transaction, calculated at market rates current at the balance sheet date. The fair values and notional amounts of derivative instruments held for trading are set out in the following table: | | The Group 2006 | | | The Bank 2006 | | | | --- | --- | --- | --- | --- | --- | --- | | Year ended 31st December 2006 | Notional contract amount £m | Assets £m | Liabilities £m | Notional contract amount £m | Assets £m | Liabilities £m | | **Derivatives held for trading** | | | | | | | | **Foreign exchange derivatives** | | | | | | | | Forward foreign exchange | 767,734 | 8,074 | (7,808) | 755,357 | 7,706 | (7,576) | | Currency swaps | 411,889 | 10,029 | (10,088) | 412,902 | 10,241 | (9,917) | | OTC options bought and sold | 320,184 | 3,923 | (3,849) | 319,223 | 3,906 | (3,835) | | OTC derivatives | 1,499,807 | 22,026 | (21,745) | 1,487,482 | 21,853 | (21,328) | | Exchange traded futures – bought and sold | 852 | – | – | 787 | – | – | | Exchange traded options – bought and sold | 115 | – | – | 115 | – | – | | **Foreign exchange derivatives** | 1,500,774 | 22,026 | (21,745) | 1,488,384 | 21,853 | (21,328) | | **Interest rate derivatives** | | | | | | | | Interest rate swaps | 8,718,015 | 61,267 | (61,510) | 8,670,621 | 60,897 | (60,701) | | Forward rate agreements | 1,335,594 | 337 | (374) | 1,308,929 | 318 | (357) | | OTC options bought and sold | 2,301,239 | 13,977 | (13,558) | 2,297,870 | 13,968 | (13,547) | | OTC derivatives | 12,354,848 | 75,581 | (75,442) | 12,277,420 | 75,183 | (74,605) | | Exchange traded futures – bought and sold | 1,057,767 | 188 | (256) | 1,005,681 | 188 | (256) | | Exchange traded options – bought and sold | 848,629 | 241 | (156) | 843,639 | 241 | (156) | | Exchange traded swaps | 3,405,109 | – | – | 3,405,109 | – | – | | **Interest rate derivatives** | 17,666,353 | 76,010 | (75,854) | 17,531,849 | 75,612 | (75,017) | | **Credit derivatives** | | | | | | | | Swaps | 1,224,548 | 9,275 | (8,894) | 1,223,730 | 9,270 | (8,894) | | **Equity and stock index derivatives** | | | | | | | | OTC options bought and sold | 114,227 | 11,171 | (15,613) | 101,280 | 8,985 | (13,452) | | Equity swaps and forwards | 24,580 | 656 | (846) | 18,585 | 194 | (348) | | OTC derivatives | 138,807 | 11,827 | (16,459) | 119,865 | 9,179 | (13,800) | | Exchange traded futures – bought and sold | 30,159 | 154 | (176) | 26,080 | 154 | (176) | | Exchange traded options – bought and sold | 30,473 | 161 | (171) | 26,378 | 161 | (169) | | **Equity and stock index derivatives** | 199,439 | 12,142 | (16,806) | 172,323 | 9,494 | (14,145) | | **Commodity derivatives** | | | | | | | | OTC options bought and sold | 52,899 | 2,568 | (2,443) | 52,569 | 2,485 | (2,367) | | Commodity swaps and forwards | 164,863 | 14,933 | (13,497) | 164,455 | 14,799 | (13,541) | | OTC derivatives | 217,762 | 17,501 | (15,940) | 217,024 | 17,284 | (15,908) | | Exchange traded futures – bought and sold | 68,710 | 13 | (33) | 67,464 | – | (21) | | Exchange traded options – bought and sold | 9,169 | 306 | (474) | 9,165 | 306 | (474) | | **Commodity derivatives** | 295,641 | 17,820 | (16,447) | 293,653 | 17,590 | (16,403) | | Derivatives with subsidiaries | – | – | – | 15,240 | – | (11,247) | | **Derivative assets/(liabilities) held for trading** | 20,886,755 | 137,273 | (139,746) | 20,709,939 | 149,059 | (147,034) | *** ## Notes to the accounts ### 13 Derivative financial instruments (continued) | | The Group 2005 | | | The Bank 2005 | | | | --- | --- | --- | --- | --- | --- | --- | | Year ended 31st December 2005 | Notional contract amount £m | Assets £m | Liabilities £m | Notional contract amount £m | Assets £m | Liabilities £m | | **Derivatives held for trading** | | | | | | | | **Foreign exchange derivatives** | | | | | | | | Forward foreign exchange | 585,635 | 7,574 | (6,707) | 557,429 | 7,041 | (6,172) | | Currency swaps | 351,319 | 8,316 | (8,045) | 349,102 | 7,897 | (8,006) | | OTC options bought and sold | 244,810 | 2,595 | (2,516) | 244,588 | 2,592 | (2,512) | | OTC derivatives | 1,181,764 | 18,485 | (17,268) | 1,151,119 | 17,530 | (16,690) | | Exchange traded futures – bought and sold | 2,304 | – | – | 2,296 | – | – | | Exchange traded options – bought and sold | 6 | – | – | – | – | – | | **Foreign exchange derivatives** | 1,184,074 | 18,485 | (17,268) | 1,153,415 | 17,530 | (16,690) | | **Interest rate derivatives** | | | | | | | | Interest rate swaps | 7,311,939 | 68,341 | (67,669) | 7,263,465 | 67,593 | (66,783) | | Forward rate agreements | 1,345,368 | 431 | (434) | 1,313,766 | 409 | (413) | | OTC options bought and sold | 1,267,683 | 12,256 | (11,598) | 1,262,747 | 12,243 | (11,586) | | OTC derivatives | 9,924,990 | 81,028 | (79,701) | 9,839,978 | 80,245 | (78,782) | | Exchange traded futures – bought and sold | 1,862,606 | – | – | 1,764,661 | – | – | | Exchange traded options – bought and sold | 826,351 | – | – | 821,624 | – | – | | Exchange traded swaps | 2,760,110 | – | – | 2,760,110 | – | – | | **Interest rate derivatives** | 15,374,057 | 81,028 | (79,701) | 15,186,373 | 80,245 | (78,782) | | **Credit derivatives** | | | | | | | | Swaps | 609,381 | 4,172 | (4,806) | 608,524 | 4,165 | (4,806) | | **Equity and stock index derivatives** | | | | | | | | OTC options bought and sold | 208,068 | 9,974 | (13,067) | 126,169 | 6,938 | (9,582) | | Equity swaps and forwards | 8,108 | 328 | (164) | 7,200 | 221 | (160) | | OTC derivatives | 216,176 | 10,302 | (13,231) | 133,369 | 7,159 | (9,742) | | Exchange traded futures – bought and sold | 52,454 | – | – | 38,450 | – | – | | Exchange traded options – bought and sold | 26,789 | – | – | 23,634 | – | – | | **Equity and stock index derivatives** | 295,419 | 10,302 | (13,231) | 195,453 | 7,159 | (9,742) | | **Commodity derivatives** | | | | | | | | OTC options bought and sold | 68,377 | 4,070 | (3,881) | 67,941 | 4,017 | (3,832) | | Commodity swaps and forwards | 211,541 | 17,674 | (17,336) | 211,571 | 17,604 | (17,496) | | OTC derivatives | 279,918 | 21,744 | (21,217) | 279,512 | 21,621 | (21,328) | | Exchange traded futures – bought and sold | 50,244 | – | – | 49,814 | – | – | | Exchange traded options – bought and sold | 11,871 | 435 | (680) | 11,869 | 435 | (680) | | **Commodity derivatives** | 342,033 | 22,179 | (21,897) | 341,195 | 22,056 | (22,008) | | Derivatives with subsidiaries | – | – | – | – | 10,852 | (8,063) | | **Derivative assets/(liabilities) held for trading** | 17,804,964 | 136,166 | (136,903) | 17,484,960 | 142,007 | (140,091) | *** ## Notes to the accounts ### 13 Derivative financial instruments (continued) | | The Group 2006 | | | The Bank 2006 | | | | --- | --- | --- | --- | --- | --- | --- | | Year ended 31st December 2006 | Notional contract amount £m | Assets £m | Liabilities £m | Notional contract amount £m | Assets £m | Liabilities £m | | **Derivatives held for risk management** | | | | | | | | **Derivatives designated as cash flow hedges** | | | | | | | | Currency swaps | – | – | – | – | – | – | | Interest rate swaps | 51,614 | 132 | (312) | 43,524 | 123 | (217) | | OTC interest rate options bought | – | – | – | – | – | – | | Exchange traded interest rate swaps | 12,077 | – | – | 12,077 | – | – | | Commodity swaps and forwards | 204 | – | (89) | – | – | – | | **Derivatives designated as cash flow hedges** | 63,895 | 132 | (401) | 55,601 | 123 | (217) | | **Derivatives designated as fair value hedges** | | | | | | | | Currency swaps | 1,454 | – | (233) | – | – | – | | Interest rate swaps | 16,940 | 240 | (152) | 15,395 | 201 | (75) | | Equity options | 1,029 | 58 | (56) | 1,027 | 56 | (56) | | Forward foreign exchange | 66 | – | – | 66 | – | – | | OTC interest rate options bought | – | – | – | – | – | – | | **Derivatives designated as fair value hedges** | 19,489 | 298 | (441) | 16,488 | 257 | (131) | | **Derivatives designated as hedges of net investments** | | | | | | | | Forward foreign exchange | 2,730 | – | (78) | – | – | – | | Currency swaps | 9,320 | 650 | (31) | – | – | – | | **Derivatives designated as hedges of net investments** | 12,050 | 650 | (109) | – | – | – | | **Derivative assets/(liabilities) held for risk management** | 95,434 | 1,080 | (951) | 72,089 | 380 | (348) | | | The Group 2005 | | | The Bank 2005 | | | | --- | --- | --- | --- | --- | --- | --- | | Year ended 31st December 2005 | Notional contract amount £m | Assets £m | Liabilities £m | Notional contract amount £m | Assets £m | Liabilities £m | | **Derivatives held for risk management** | | | | | | | | **Derivatives designated as cash flow hedges** | | | | | | | | Currency swaps | 14 | 1 | – | 14 | 1 | – | | Interest rate swaps | 27,042 | 230 | (290) | 21,346 | 207 | (281) | | OTC interest rate options bought | 782 | 1 | – | – | – | – | | Exchange traded interest rate swaps | 11,899 | – | – | 11,899 | – | – | | Commodity swaps and forwards | 343 | – | (193) | – | – | – | | **Derivatives designated as cash flow hedges** | 40,080 | 232 | (483) | 33,259 | 208 | (281) | | **Derivatives designated as fair value hedges** | | | | | | | | Currency swaps | 1,686 | – | (81) | – | – | – | | Interest rate swaps | 29,394 | 387 | (190) | 27,798 | 373 | (119) | | Equity options | 1,084 | 36 | (46) | 979 | 36 | (35) | | Forward foreign exchange | 28 | – | (14) | 28 | – | (3) | | OTC interest rate options bought | 1,287 | – | – | 1,287 | – | – | | **Derivatives designated as fair value hedges** | 33,479 | 423 | (331) | 30,092 | 409 | (157) | | **Derivatives designated as hedges of net investments** | | | | | | | | Currency swaps | 5,919 | 2 | (254) | – | – | – | | **Derivatives designated as hedges of net investments** | 5,919 | 2 | (254) | – | – | – | | **Derivative assets/(liabilities) held for risk management** | 79,478 | 657 | (1,068) | 63,351 | 617 | (438) | *** ## Notes to the accounts ### 13 Derivative financial instruments (continued) Interest rate derivatives, designated as cash flow hedges, primarily hedge the exposure to cash flow variability from interest rates of variable rate loans to banks and customers, variable rate debt securities held and highly probable forecast financing transactions and reinvestments. Interest rate derivatives designated as fair value hedges primarily hedge the interest rate risk of fixed rate borrowings in issue, fixed rate loans to banks and customers and investments in fixed rate debt securities held. Currency derivatives are primarily designated as hedges of the foreign currency risk of net investments in foreign operations. The Group’s total derivative asset and liability position as reported on the balance sheet is as follows: | | The Group 2006 | | | The Bank 2006 | | | | --- | --- | --- | --- | --- | --- | --- | | Year ended 31st December 2006 | Notional contract amount £m | Assets £m | Liabilities £m | Notional contract amount £m | Assets £m | Liabilities £m | | Total derivative assets/(liabilities) held for trading | 20,886,755 | 137,273 | (139,746) | 20,709,939 | 149,059 | (147,034) | | Total derivative assets/(liabilities) held for risk management | 95,434 | 1,080 | (951) | 72,089 | 380 | (348) | | **Recognised derivative assets/(liabilities)** | **20,982,189** | **138,353** | **(140,697)** | **20,782,028** | **149,439** | **(147,382)** | | | The Group 2005 | | | The Bank 2005 | | | | --- | --- | --- | --- | --- | --- | --- | | Year ended 31st December 2005 | Notional contract amount £m | Assets £m | Liabilities £m | Notional contract amount £m | Assets £m | Liabilities £m | | Total derivative assets/(liabilities) held for trading | 17,804,964 | 136,166 | (136,903) | 17,484,960 | 142,007 | (140,091) | | Total derivative assets/(liabilities) held for risk management | 79,478 | 657 | (1,068) | 63,351 | 617 | (438) | | **Recognised derivative assets/(liabilities)** | **17,884,442** | **136,823** | **(137,971)** | **17,548,311** | **142,624** | **(140,529)** | The Group has hedged the following forecast cash flows, which primarily vary with interest rates. These cash flows are expected to impact the income statement in the following periods, excluding any hedge adjustments that may be applied: | 2006 | Total £m | Up to one year £m | Between one to two years £m | Between two to three years £m | Between three to four years £m | Between four to five years £m | More than five years £m | | --- | --- | --- | --- | --- | --- | --- | --- | | **The Group** | | | | | | | | | Forecast receivable cash flows | 5,111 | 1,500 | 1,452 | 954 | 689 | 410 | 106 | | Forecast payable cash flows | 1,280 | 704 | 349 | 121 | 73 | 30 | 3 | | 2005 | Total £m | Up to one year £m | Between one to two years £m | Between two to three years £m | Between three to four years £m | Between four to five years £m | More than five years £m | | --- | --- | --- | --- | --- | --- | --- | --- | | **The Group** | | | | | | | | | Forecast receivable cash flows | 3,230 | 779 | 768 | 704 | 458 | 265 | 256 | | Forecast payable cash flows | 2,300 | 358 | 350 | 337 | 287 | 238 | 730 | *** ## Notes to the accounts ### 13 Derivative financial instruments (continued) | 2006 | Total £m | Up to one year £m | Between one to two years £m | Between two to three years £m | Between three to four years £m | Between four to five years £m | More than five years £m | | --- | --- | --- | --- | --- | --- | --- | --- | | **The Bank** | | | | | | | | | Forecast receivable cash flows | 4,581 | 1,305 | 1,372 | 876 | 642 | 295 | 91 | | Forecast payable cash flows | 1,280 | 704 | 349 | 121 | 73 | 30 | 3 | | 2005 | Total £m | Up to one year £m | Between one to two years £m | Between two to three years £m | Between three to four years £m | Between four to five years £m | More than five years £m | | --- | --- | --- | --- | --- | --- | --- | --- | | **The Bank** | | | | | | | | | Forecast receivable cash flows | 2,960 | 716 | 714 | 660 | 423 | 236 | 211 | | Forecast payable cash flows | 2,300 | 358 | 350 | 337 | 287 | 238 | 730 | The maximum length of time over which the Group and the Bank is hedging its exposure to the variability in future cash flows for forecasted transactions excluding those forecasted transactions related to the payment of variable interest on existing financial instruments is eight years (2005: 29 years). No gain or loss on forecast transactions accorded hedge accounting in 2006 that are no longer expected to occur remains in equity. Net gains/(losses) arising on fair value hedges in net interest income during the year were: | | The Group | | The Bank | | | --- | --- | --- | --- | --- | | | 2006 £m | 2005 £m | 2006 £m | 2005 £m | | On hedging instruments | (460) | 204 | (293) | 204 | | On the hedged items attributable to the hedged risk | 465 | (164) | 293 | (164) | | **Ineffectiveness** | **5** | **40** | **–** | **40** | Ineffectiveness recognised in relation to cash flow hedges in net interest income for the Group was a loss of £23m (2005: loss of £34m). Ineffectiveness recognised in relation to hedge of net investment for the Group was a gain of £13m (2005: loss of £5m). Ineffectiveness recognised in relation to cash flow hedges in net interest income for the Bank was a loss of £19m (2005: loss of £34m). Ineffectiveness recognised in relation to hedge of net investment for the Bank was a gain of £nil (2005: £nil). *** ## Notes to the accounts ### 14 Loans and advances to banks | | The Group | | The Bank | | | --- | --- | --- | --- | --- | | | 2006 £m | 2005 £m | 2006 £m | 2005 £m | | **Repayable** | | | | | | on demand | 2,887 | 3,929 | 2,214 | 5,737 | | not more than three months | 18,809 | 15,921 | 17,226 | 15,004 | | over three months but not more than six months | 800 | 2,006 | 546 | 1,183 | | over six months but not more than one year | 3,064 | 3,169 | 672 | 144 | | over one year but not more than three years | 1,595 | 1,852 | 785 | 524 | | over three years but not more than five years | 1,130 | 779 | 789 | 491 | | over five years but not more than ten years | 1,012 | 1,047 | 1,203 | 178 | | over ten years | 1,633 | 2,406 | 434 | 656 | | **Total** | **30,930** | **31,109** | **23,869** | **23,917** | | less: Allowance for impairment (Note 16) | (4) | (4) | (2) | (2) | | **Loans and advances to banks** | **30,926** | **31,105** | **23,867** | **23,915** | | **By geographical area** | | | | | | United Kingdom | 6,229 | 4,624 | 3,157 | 8,028 | | Other European Union | 8,513 | 5,423 | 11,481 | 8,898 | | United States | 9,056 | 13,267 | 3,837 | 2,732 | | Africa | 2,219 | 880 | 771 | 79 | | Rest of the World | 4,913 | 6,915 | 4,623 | 4,180 | | **Total** | **30,930** | **31,109** | **23,869** | **23,917** | | Less: Allowance for impairment (Note 16) | (4) | (4) | (2) | (2) | | **Loans and advances to banks** | **30,926** | **31,105** | **23,867** | **23,915** | | **Included above: due from subsidiaries** | n/a | n/a | 8,871 | 10,014 | The Group is required to maintain balances with central banks and other regulatory authorities and these amounted to £1,262m at 31st December 2006 (2005: £1,218m). The Bank balances with central banks and other regulatory authorities amounted to £403m at 31st December 2006 (2005: £354m). Information relating to effective interest rates can be found in Note 53. The geographical analysis is based on the location of the customer to which the lendings are made. *** ## Notes to the accounts ### 15 Loans and advances to customers | | The Group | | The Bank | | | --- | --- | --- | --- | --- | | | 2006 £m | 2005 £m | 2006 £m | 2005 £m | | **Repayable:** | | | | | | on demand | 33,994 | 34,945 | 43,539 | 51,577 | | not more than three months | 44,728 | 44,280 | 85,524 | 67,022 | | over three months but not more than six months | 10,092 | 11,332 | 5,997 | 9,870 | | over six months but not more than one year | 15,904 | 21,870 | 8,433 | 16,351 | | over one year but not more than three years | 32,559 | 31,254 | 23,098 | 25,860 | | over three years but not more than five years | 27,868 | 27,967 | 22,802 | 21,819 | | over five years but not more than ten years | 38,091 | 26,840 | 33,462 | 18,686 | | over ten years | 82,395 | 73,854 | 59,529 | 40,539 | | **Total** | **285,631** | **272,342** | **282,384** | **251,724** | | Less: Allowance for impairment (Note 16) | (3,331) | (3,446) | (2,564) | (2,510) | | **Loans and advances to customers** | **282,300** | **268,896** | **279,820** | **249,214** | | **By geographical area** | | | | | | United Kingdom | 170,518 | 163,759 | 227,981 | 206,793 | | Other European Union | 43,430 | 38,923 | 24,917 | 24,990 | | United States | 25,677 | 22,925 | 15,358 | 8,034 | | Africa | 31,691 | 33,221 | 2,100 | 1,975 | | Rest of the World | 14,315 | 13,514 | 12,028 | 9,932 | | **Total** | **285,631** | **272,342** | **282,384** | **251,724** | | Less: Allowance for impairment (Note 16) | (3,331) | (3,446) | (2,564) | (2,510) | | **Loans and advances to customers** | **282,300** | **268,896** | **279,820** | **249,214** | | **Included above: due from subsidiaries** | n/a | n/a | 78,061 | 55,334 | **Loans and advances to customers by industry** | | The Group | | The Bank | | | --- | --- | --- | --- | --- | | At 31st December | 2006 £m | 2005 £m | 2006 £m | 2005 £m | | Financial services | 45,954 | 43,102 | 106,291 | 80,020 | | Agriculture, forestry and fishing | 3,997 | 3,785 | 2,420 | 2,413 | | Manufacturing | 15,451 | 13,779 | 12,971 | 11,567 | | Construction | 4,056 | 5,020 | 3,170 | 3,261 | | Property | 16,528 | 16,325 | 12,136 | 12,924 | | Energy and water | 6,810 | 6,891 | 6,387 | 6,370 | | Wholesale and retail distribution and leisure | 15,490 | 17,760 | 14,175 | 14,865 | | Transport | 5,586 | 5,960 | 4,405 | 4,649 | | Postal and communication | 2,180 | 1,313 | 1,943 | 1,243 | | Business and other services | 29,425 | 24,247 | 24,481 | 19,871 | | Home loans | 98,172 | 89,529 | 70,565 | 67,542 | | Other personal | 31,840 | 35,543 | 23,355 | 26,949 | | Finance lease receivables (Note 42) | 10,142 | 9,088 | 85 | 50 | | | **285,631** | **272,342** | **282,384** | **251,724** | | Less: Allowance for impairment (Note 16) | (3,331) | (3,446) | (2,564) | (2,510) | | **Loans and advances to customers** | **282,300** | **268,896** | **279,820** | **249,214** | *** ## Notes to the accounts ### 15 Loans and advances to customers (continued) **Loans and advances to customers in the UK** | | The Group | | The Bank | | | --- | --- | --- | --- | --- | | At 31st December | 2006 £m | 2005 £m | 2006 £m | 2005 £m | | Financial services | 14,011 | 11,958 | 83,222 | 67,556 | | Agriculture, forestry and fishing | 2,307 | 2,409 | 2,289 | 2,364 | | Manufacturing | 9,047 | 8,469 | 9,044 | 8,379 | | Construction | 2,761 | 3,090 | 2,715 | 3,054 | | Property | 10,010 | 10,547 | 9,719 | 10,200 | | Energy and water | 2,360 | 2,701 | 2,290 | 2,611 | | Wholesale and retail distribution and leisure | 12,951 | 12,747 | 12,758 | 12,632 | | Transport | 2,745 | 2,797 | 2,688 | 2,501 | | Postal and communication | 899 | 455 | 892 | 456 | | Business and other services | 19,266 | 15,403 | 18,347 | 14,116 | | Home loans | 67,687 | 61,256 | 62,736 | 57,456 | | Other personal | 22,551 | 26,724 | 21,256 | 25,435 | | Finance lease receivables | 3,923 | 5,203 | 25 | 33 | | **Loans and advances to customers in the UK** | **170,518** | **163,759** | **227,981** | **206,793** | **Loans and advances to customers outside the UK** | | The Group | | The Bank | | | --- | --- | --- | --- | --- | | At 31st December | 2006 £m | 2005 £m | 2006 £m | 2005 £m | | Financial Services | 31,943 | 31,144 | 23,069 | 12,464 | | Agriculture, forestry and fishing | 1,690 | 1,376 | 131 | 49 | | Manufacturing | 6,404 | 5,310 | 3,927 | 3,188 | | Construction | 1,295 | 1,930 | 455 | 207 | | Property | 6,518 | 5,778 | 2,417 | 2,724 | | Energy and water | 4,450 | 4,190 | 4,097 | 3,759 | | Wholesale and retail distribution and leisure | 2,539 | 5,013 | 1,417 | 2,233 | | Transport | 2,841 | 3,163 | 1,717 | 2,148 | | Postal and communication | 1,281 | 858 | 1,051 | 787 | | Business and other services | 10,159 | 8,844 | 6,134 | 5,755 | | Home loans | 30,485 | 28,273 | 7,829 | 10,086 | | Other personal | 9,289 | 8,819 | 2,099 | 1,514 | | Finance lease receivables | 6,219 | 3,885 | 60 | 17 | | **Loans and advances to customers outside the UK** | **115,113** | **108,583** | **54,403** | **44,931** | The geographical analysis is based on the location of the customer to which the lendings are made. Effective interest rates can be found in Note 53. Certain of the loans and advances are subject to securitisations which are described in Note 34. *** ## Notes to the accounts ### 16 Allowance for impairment The movement in the allowance for impairment is as follows: | | The Group | | The Bank | | | --- | --- | --- | --- | --- | | | 2006 £m | 2005 £m | 2006 £m | 2005 £m | | **At beginning of year** | **3,450** | **2,637** | **2,512** | **2,373** | | Acquisitions and disposals | (23) | 555 | – | (11) | | Unwind of discount | (98) | (76) | (89) | (71) | | Exchange and other adjustments | (153) | 125 | (24) | 13 | | Amounts written off | (2,174) | (1,587) | (1,763) | (1,382) | | Recoveries | 259 | 222 | 209 | 175 | | Amounts charged against profit | 2,074 | 1,574 | 1,721 | 1,415 | | **At end of year** | **3,335** | **3,450** | **2,566** | **2,512** | Allowances for loan impairment represent management’s estimate of the losses incurred in the loan portfolios at the balance sheet date. For the retail and small business portfolios, which comprise large numbers of small homogeneous assets with similar risk characteristics, statistical techniques are used to calculate impairment allowances on a portfolio basis. These models contain judgemental inputs. The impairment charge in relation to retail and small business portfolios is £1,809m or 87% (2005: £1,254m or 80%) of the total impairment charge in 2006. For larger accounts, impairment allowances are calculated on an individual basis using discounted expected future cash flows. Subjective judgements are made in this process. Changes in these estimates could result in a change in allowances and have a direct impact on the impairment charge. The impairment charge in relation to larger accounts is £265m or 13% (2005: £320m or 20%) of the total impairment charge in 2006. | | The Group | | The Bank | | | --- | --- | --- | --- | --- | | **Allowance for impairment at 31st December** | 2006 £m | 2005 £m | 2006 £m | 2005 £m | | United Kingdom | 2,477 | 2,266 | 2,238 | 2,115 | | Other European Union | 311 | 284 | 243 | 188 | | United States | 100 | 130 | 71 | 114 | | Africa | 417 | 647 | 7 | 14 | | Rest of the World | 30 | 123 | 7 | 81 | | **Allowance for impairment at 31st December** | **3,335** | **3,450** | **2,566** | **2,512** | *** ## Notes to the accounts ### 17 Available for sale financial investments | | The Group | | The Bank | | | --- | --- | --- | --- | --- | | | 2006 £m | 2005 £m | 2006 £m | 2005 £m | | Debt securities | 47,912 | 50,024 | 30,628 | 48,170 | | Equity securities | 1,620 | 1,456 | 611 | 411 | | Treasury bills and other eligible bills | 2,420 | 2,223 | 325 | 444 | | **Available for sale financial investments** | **51,952** | **53,703** | **31,564** | **49,025** | | | The Group | | The Bank | | | --- | --- | --- | --- | --- | | **Movement in available for sale financial investments** | 2006 £m | 2005 £m | 2006 £m | 2005 £m | | **At beginning of year** | **53,703** | **48,293** | **49,025** | **40,469** | | Exchange and other adjustments | (3,999) | 1,791 | (2,213) | 2,617 | | Acquisitions and transfers | 47,109 | 54,556 | 25,956 | 44,539 | | Disposals (sale and redemption) | (44,959) | (50,609) | (41,229) | (38,485) | | Gains/(losses) from changes in fair value recognised in equity | 182 | (238) | 28 | (116) | | Impairment | (86) | (4) | – | – | | Amortisation of discounts/premium | 2 | (86) | (3) | 1 | | **At end of year** | **51,952** | **53,703** | **31,564** | **49,025** | | | Book value | | | | | --- | --- | --- | --- | --- | | | The Group | | The Bank | | | **Debt securities** | 2006 £m | 2005 £m | 2006 £m | 2005 £m | | – United Kingdom government | 758 | 31 | 732 | 1 | | – Other government | 12,587 | 14,860 | 10,966 | 13,673 | | – Other public bodies | 280 | 216 | – | – | | – Mortgage and asset backed securities | 1,706 | 3,062 | – | 16 | | – Corporate issuers | 27,089 | 25,590 | 18,914 | 29,881 | | – Other issuers | 5,492 | 6,265 | 16 | 4,599 | | **Total debt securities** | **47,912** | **50,024** | **30,628** | **48,170** | | Equity securities | 1,620 | 1,456 | 611 | 411 | | Treasury bills and other eligible bills | 2,420 | 2,223 | 325 | 444 | | **Available for sale financial investments** | **51,952** | **53,703** | **31,564** | **49,025** | Gross gains of £354m (2005: £318m) and gross losses of £47m (2005: £198m) have been realised on the sale of available for sale financial investments. A maturity analysis of available for sale financial investments is included in Note 56. The basis of determining cost during the calculation of gains and losses on available for sale investments is on an instrument by instrument basis. *** ## Notes to the accounts ### 18 Securities borrowing, securities lending, repurchase and reverse repurchase agreements The following amounts were included in the balance sheet and are reported on a net basis where the Group has the intention and the ability to settle net, or realise simultaneously. | | The Group | | The Bank | | | --- | --- | --- | --- | --- | | | 2006 £m | 2005 £m | 2006 £m | 2005 £m | | **Reverse repurchase agreements and cash collateral on securities borrowed** | | | | | | Banks | 85,336 | 83,610 | 44,172 | 45,791 | | Customers | 88,754 | 76,788 | 136,453 | 107,628 | | **Reverse repurchase agreements and cash collateral on securities borrowed** | **174,090** | **160,398** | **180,625** | **153,419** | | **Repurchase agreements and cash collateral on securities lent** | | | | | | Banks | 79,833 | 66,939 | 48,187 | 42,431 | | Customers | 57,123 | 54,239 | 61,331 | 72,124 | | **Repurchase agreements and cash collateral on securities lent** | **136,956** | **121,178** | **109,518** | **114,555** | Reverse repurchase agreements and cash collateral on securities borrowed are accounted for as collateralised loans. It is the Group’s policy to seek collateral at the outset equal to 100% to 105% of the loan amount. The level of collateral held is monitored daily and further collateral calls made to bring the level of cash held and the market value of collateral in line with the loan balance. Under certain transactions, including reverse repurchase agreements and stock borrowing transactions, the Group is allowed to sell or repledge the collateral held. The fair value at the balance sheet date of collateral accepted and repledged to others was as follows: | | The Group | | The Bank | | | --- | --- | --- | --- | --- | | | 2006 £m | 2005 £m | 2006 £m | 2005 £m | | Fair value of securities accepted as collateral under reverse repurchase agreements and stock borrowing transactions which can be repledged or resold | 279,591 | 248,010 | 244,392 | 160,761 | | Of which, fair value of securities repledged/transferred to others | 210,182 | 203,777 | 209,978 | 137,188 | ### 19 Other assets | | The Group | | The Bank | | | --- | --- | --- | --- | --- | | | 2006 £m | 2005 £m | 2006 £m | 2005 £m | | Sundry debtors | 4,298 | 3,569 | 2,873 | 1,729 | | Prepayments | 658 | 722 | 340 | 83 | | Accrued income | 722 | 329 | 136 | 92 | | Reinsurance assets | 172 | 114 | – | – | | **Other assets** | **5,850** | **4,734** | **3,349** | **1,904** | Included in the above Group balances, £5,065m (2005: £3,848m) are expected to be recovered within no more than 12 months after the balance sheet date and balances of £785m (2005: £886m) expected to be recovered more than 12 months after the balance sheet date. Included in the above Bank balances, £2,636m (2005: £1,727m) are expected to be recovered within no more than 12 months after the balance sheet date, and balances of £713m (2005: £177m) expected to be recovered more than 12 months after the balance sheet date. *** ## Notes to the accounts ### 20 Current and deferred tax The components of taxes are as follows: | | The Group | | | | The Bank | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | 2006 £m | | 2005 £m | | 2006 £m | | 2005 £m | | | | Assets | Liabilities | Assets | Liabilities | Assets | Liabilities | Assets | Liabilities | | **Current tax** | | | | | | | | | | United Kingdom | 420 | 481 | – | 484 | 1,193 | 488 | – | 137 | | Overseas | 137 | 539 | – | 263 | – | 24 | – | 1 | | **Current tax** | **557** | **1,020** | **–** | **747** | **1,193** | **512** | **–** | **138** | | **Deferred tax** | | | | | | | | | | United Kingdom | 1,613 | 1,111 | 1,425 | 1,517 | 1,111 | 50 | 1,158 | 125 | | Overseas | 392 | 412 | 284 | 206 | 60 | 17 | 38 | 15 | | **Deferred tax** | **2,005** | **1,523** | **1,709** | **1,723** | **1,171** | **67** | **1,196** | **140** | Deferred taxes are calculated on all temporary differences under the liability method. The movement on the deferred tax account is as follows: | | The Group | | The Bank | | | --- | --- | --- | --- | --- | | | 2006 £m | 2005 £m | 2006 £m | 2005 £m | | At beginning of year | (14) | 244 | 1,056 | 1,136 | | Income statement (charge)/credit | (4) | 85 | (116) | 69 | | **Equity** | | | | | | Available for sale investments | 4 | 10 | – | 1 | | Cash flow hedges | 128 | (112) | 263 | (112) | | Share-based payments | 24 | 101 | (98) | 27 | | Other equity movements | 48 | (24) | 12 | – | | Acquisitions and disposals | 264 | (199) | – | (6) | | Exchange and other adjustments | 32 | (119) | (13) | (59) | | **At end of year** | **482** | **(14)** | **1,104** | **1,056** | *** ## Notes to the accounts ### 20 Current and deferred tax (continued) Deferred tax assets and liabilities are attributable to the following items: | | The Group | | The Bank | | | --- | --- | --- | --- | --- | | | 2006 £m | 2005 £m | 2006 £m | 2005 £m | | **Deferred tax liabilities** | | | | | | Accelerated tax depreciation | 705 | 883 | 9 | 8 | | Available for sale investments | 116 | 119 | 56 | 32 | | Cash flow hedges | – | 138 | 2 | 81 | | Other | 702 | 583 | – | 19 | | **Deferred tax liabilities** | **1,523** | **1,723** | **67** | **140** | | **Deferred tax assets** | | | | | | Pensions and other retirement benefits | 622 | 609 | 552 | 608 | | Allowance for impairment on loans | 69 | 41 | 23 | – | | Other provisions | 436 | 342 | 73 | 150 | | Cash flow hedges | 91 | 44 | 57 | 43 | | Tax losses carried forward | 1 | 26 | 1 | 12 | | Share-based payments | 380 | 232 | 80 | 136 | | Other | 406 | 415 | 385 | 247 | | **Deferred tax assets** | **2,005** | **1,709** | **1,171** | **1,196** | | **Net deferred tax asset/(liability)** | **482** | **(14)** | **1,104** | **1,056** | | **Disclosed as deferred tax liabilities** | **282** | **700** | **–** | **–** | | **Disclosed as deferred tax assets** | **764** | **686** | **1,104** | **1,056** | | **Net deferred tax asset/(liability)** | **482** | **(14)** | **1,104** | **1,056** | Deferred tax assets and liabilities are offset if, and only if, there is a legally enforceable right to set off and the balances relate to income tax levied by the same taxation authority on either the same taxable entity or different taxable entities within the same tax group where there is the intention and ability to settle on a net basis or realise the assets and liabilities simultaneously. The amount of deferred tax liability expected to be settled after more than 12 months for the Group is £1,046m (2005: £982m) and for the Bank is £65m (2005: £80m). The amount of deferred tax asset expected to be recovered after more than 12 months for the Group is £1,582m (2005: £1,686m) and for the Bank is £824m (2005: £1,180m). The deferred tax assets balance for the Group includes £106m (2005: £27m) which is the excess deferred tax assets over deferred tax liabilities in entities which have suffered a loss in either the current or prior year. This is based on management assessment that it is probable that the relevant entities will have taxable profits against which the temporary differences can be utilised. The deferred tax charge/(credit) in the income statement comprises the following temporary differences: | | The Group | | The Bank | | | --- | --- | --- | --- | --- | | | 2006 £m | 2005 £m | 2006 £m | 2005 £m | | Accelerated tax depreciation | 120 | 130 | 1 | 13 | | Pensions and other retirement benefits | (24) | 39 | 56 | 32 | | Allowance for impairment on loans | (30) | (1) | (23) | 1 | | Other provisions | (105) | (133) | 77 | (20) | | Tax losses carry forward | 25 | (20) | 11 | (9) | | Available for sale investments | 8 | (52) | 24 | – | | Cash flow hedges | (14) | 1 | 36 | (37) | | Share-based payments | (77) | (115) | (42) | (114) | | Other | 101 | 66 | (24) | 65 | | **Total** | **4** | **(85)** | **116** | **(69)** | *** ## Notes to the accounts ### 20 Current and deferred tax (continued) Deferred tax assets have not been recognised in respect of the following items: | | The Group | | The Bank | | | --- | --- | --- | --- | --- | | | 2006 £m | 2005 £m | 2006 £m | 2005 £m | | Deductible temporary differences | 395 | 340 | 14 | – | | Unused tax losses | 190 | 363 | – | – | | Unused tax credits | 98 | 24 | – | 17 | The following tax losses of the Group expire: £3m in 2007; £3m and £4m in 2009. The other tax losses, tax credits and temporary differences do not expire under current tax legislation. Deferred tax assets have not been recognised in respect of these items because it is not probable that future taxable profit will be available against which the Group can utilise the benefits. The amount of temporary differences associated with investments in subsidiaries, branches, associates and in joint ventures for which deferred tax liabilities have not been recognised in the Group is £3,387m (2005: £2,126m). ### 21 Investment in associates and joint ventures **Share of net assets** | | Associates | | Joint ventures | | Total | | | --- | --- | --- | --- | --- | --- | --- | | | 2006 £m | 2005 £m | 2006 £m | 2005 £m | 2006 £m | 2005 £m | | **The Group** | | | | | | | | **At beginning of year** | **427** | **399** | **119** | **30** | **546** | **429** | | Share of results before tax | 63 | 63 | (6) | (12) | 57 | 51 | | Share of tax | (10) | (10) | (1) | 4 | (11) | (6) | | Share of post-tax results | 53 | 53 | (7) | (8) | 46 | 45 | | Dividends paid | (17) | (23) | – | – | (17) | (23) | | New investments | 2 | – | 7 | 81 | 9 | 81 | | Acquisitions | 51 | 72 | 102 | 23 | 153 | 95 | | Disposals | (404) | (39) | (72) | (1) | (476) | (40) | | Exchange and other adjustments | (38) | (35) | 5 | (6) | (33) | (41) | | **At end of year** | **74** | **427** | **154** | **119** | **228** | **546** | | | Associates | | Joint ventures | | Total | | | --- | --- | --- | --- | --- | --- | --- | | | 2006 £m | 2005 £m | 2006 £m | 2005 £m | 2006 £m | 2005 £m | | **The Bank** | | | | | | | | **At beginning of year** | **326** | **362** | **84** | **4** | **410** | **366** | | New investments | – | – | 6 | 80 | 6 | 80 | | Disposals | (319) | (36) | – | – | (319) | (36) | | **At end of year** | **7** | **326** | **90** | **84** | **97** | **410** | The fair value of the investment in Gabetti Holding SpA, which is listed on the Milan stock exchange, is £16m (2005: £15m). **Disposal of FirstCaribbean International Bank** On 22nd December 2006 the Group disposed of its investment in FirstCaribbean International Bank, its former principal associate, for cash consideration, net of transaction costs of £583m, which, after deducting the Group’s share of its net assets on the date of disposal, resulted in a profit of £247m. Following this transaction, there were no individually significant associates or joint ventures. Of the £46m share of post-tax results of associates and joint ventures, FirstCaribbean International Bank contributed £41m (2005: £37m). *** ## Notes to the accounts ### 21 Investment in associates and joint ventures (continued) Included within Barclays share of associates’ and joint ventures’ assets is goodwill as follows: **Goodwill** | | The Group | | The Bank | | | --- | --- | --- | --- | --- | | | 2006 £m | 2005 £m | 2006 £m | 2005 £m | | **Cost** | | | | | | At beginning of year | 205 | 122 | 189 | 122 | | Acquisitions | – | 83 | – | 67 | | Disposals | (121) | – | (121) | – | | Transfer | (43) | – | (43) | – | | **At end of year** | **41** | **205** | **25** | **189** | The table below provides summarised financial information of the Group’s associates and joint ventures (the entities’ entire financial position and results of operations are presented, not the Group’s share). | | 2006 | | | 2005 | | | | --- | --- | --- | --- | --- | --- | --- | | | First-Caribbean Bank £m | Other associates £m | Joint ventures £m | First-Caribbean Bank £m | Other associates £m | Joint ventures £m | | Property, plant and equipment | – | 599 | 142 | 86 | 454 | 119 | | Financial investments | – | 42 | 2 | 376 | 66 | 24 | | Trading portfolio assets | – | 1 | – | 389 | – | – | | Loans to banks and customers | – | 1,378 | 797 | 4,379 | 1,575 | 393 | | Other assets | – | 541 | 199 | 267 | 226 | 16 | | **Total assets** | **–** | **2,523** | **1,140** | **5,497** | **2,321** | **552** | | Deposits from banks and customers | – | 1,421 | 769 | 4,519 | 1,527 | 369 | | Trading portfolio liabilities | – | 1 | – | 115 | – | – | | Other liabilities | – | 887 | 187 | 270 | 572 | 188 | | Shareholders’ equity | – | 214 | 184 | 593 | 222 | (5) | | **Total liabilities** | **–** | **2,523** | **1,140** | **5,497** | **2,321** | **552** | | Net income | 274 | 264 | 178 | 234 | 213 | 176 | | Operating expenses | (167) | (167) | (178) | (148) | (161) | (213) | | Profit/(loss) before tax | 107 | 97 | – | 86 | 52 | (37) | | Profit/(loss) after tax | 96 | 90 | (2) | 76 | 37 | (26) | The amounts included above are based on accounts made up to 31st December 2006 with the exception of FirstCaribbean International Bank and certain undertakings included within the Other associates category for which the amounts are based on accounts made up to dates not earlier than three months before the balance sheet date. Other associates in 2006 includes £1,525m (2005: £1,885m) of assets, £1,380m (2005: £1,741m) of liabilities and £25m (2005: £20m) of profit after tax in associates within the Absa Group. The Group’s share of commitments and contingencies incurred in relation to its joint ventures is £nil (2005: £1m) and its share of contingent liabilities of an associate or joint venture for which it is contingently liable is £nil (2005: £252m). *** ## Notes to the accounts ### 22 Investments in subsidiaries Investments in subsidiaries, the principal of which are engaged in banking related activities, are recorded in the balance sheet at historical cost, less dividends received out of the pre-acquisition profits of the subsidiaries and any impairment. At 31st December 2006 the historical cost of investments in subsidiaries was £16,548m (2005: £15,939m), and allowances recognised against these investments was £1,767m (2005: £1,795m) of impairment and £464m (2005: £464m) dividends received out of pre-acquisition profits of the subsidiaries. Details of the principal subsidiaries are shown in Note 47. ### 23 Goodwill | | The Group | | The Bank | | | --- | --- | --- | --- | --- | | | 2006 £m | 2005 £m | 2006 £m | 2005 £m | | **Net book value** | | | | | | At beginning of year | 6,022 | 4,518 | 3,591 | 3,539 | | Acquisitions | 390 | 1,417 | – | 52 | | Disposals | (14) | – | – | – | | Exchange and other adjustments | (306) | 87 | – | – | | **At end of year** | **6,092** | **6,022** | **3,591** | **3,591** | Goodwill is reviewed annually for impairment, or more frequently when there are indications that impairment may have occurred. There was no impairment identified in 2006 (2005: £nil). | | The Group | | The Bank | | | --- | --- | --- | --- | --- | | | 2006 £m | 2005 £m | 2006 £m | 2005 £m | | UK Banking | 2,820 | 2,824 | 2,818 | 2,818 | | Barclaycard | 403 | 418 | 257 | 257 | | International Retail and Commercial Banking | 1,481 | 1,725 | 94 | 94 | | Barclays Capital | 72 | 89 | – | – | | Barclays Global Investors | 673 | 322 | 15 | 15 | | Barclays Wealth | 629 | 629 | 407 | 407 | | Head office functions and other operations | 14 | 15 | – | – | | **Goodwill** | **6,092** | **6,022** | **3,591** | **3,591** | Goodwill is allocated to business operations. The recoverable amount of each operation’s goodwill is based on value-in-use calculations using an appropriate pre-tax cost of equity for the market and associated risk. The principal goodwill relating to UK Banking and International Retail and Commercial Banking are Woolwich and Absa respectively. Woolwich and Absa future cash flows are based on approved budgets and plans. Woolwich has applied a growth factor of 3% (proxy for inflation) to cash flows for the period 2010 to 2020. Absa has applied a growth rate of 8% to cash flows for the four years from 2010 to 2013 and a rate of 4% for the years from 2014 to 2020. Both businesses justify the use of longer cash flow projections due to the long-term nature of these businesses within the Group. *** ## Notes to the accounts ### 24 Intangible assets | 2006 | Internally generated software £m | Other software £m | Core deposit intangibles £m | Brands £m | Customer lists £m | Mortgage servicing rights £m | Licences and other £m | Total £m | | --- | --- | --- | --- | --- | --- | --- | --- | --- | | **The Group** | | | | | | | | | | **Cost or valuation** | | | | | | | | | | At 1st January 2006 | 188 | 43 | 306 | 183 | 582 | – | 139 | 1,441 | | Acquisitions | – | – | – | – | – | 114 | 2 | 116 | | Additions | 95 | 86 | – | – | – | 16 | 13 | 210 | | Exchange and other adjustments | (16) | (6) | (64) | (38) | (115) | (8) | (14) | (261) | | **At 31st December 2006** | **267** | **123** | **242** | **145** | **467** | **122** | **140** | **1,506** | | **Accumulated amortisation and impairment** | | | | | | | | | | At 1st January 2006 | (90) | (18) | (7) | (9) | (29) | – | (19) | (172) | | Amortisation charge | (29) | (7) | (20) | (16) | (44) | (11) | (9) | (136) | | Impairment charge | (2) | (5) | – | – | – | – | – | (7) | | Exchange and other adjustments | 5 | 1 | 3 | 3 | 9 | 1 | 2 | 24 | | **At 31st December 2006** | **(116)** | **(29)** | **(24)** | **(22)** | **(64)** | **(10)** | **(26)** | **(291)** | | **Net book value** | **151** | **94** | **218** | **123** | **403** | **112** | **114** | **1,215** | | 2006 | Internally generated software £m | Other software £m | Core deposit intangibles £m | Brands £m | Customer lists £m | Mortgage servicing rights £m | Licences and other £m | Total £m | | --- | --- | --- | --- | --- | --- | --- | --- | --- | | **The Bank** | | | | | | | | | | **Cost or valuation** | | | | | | | | | | At 1st January 2006 | 149 | 11 | 7 | – | 10 | – | 10 | 187 | | Acquisitions | – | – | – | – | – | 114 | – | 114 | | Additions | 78 | 68 | – | – | – | 16 | 13 | 175 | | Exchange and other adjustments | (12) | – | (2) | – | 1 | (8) | – | (21) | | **At 31st December 2006** | **215** | **79** | **5** | **–** | **11** | **122** | **23** | **455** | | **Accumulated amortisation and impairment** | | | | | | | | | | At 1st January 2006 | (66) | (2) | – | – | (1) | – | (2) | (71) | | Amortisation charge | (24) | – | (1) | – | (1) | (11) | (1) | (38) | | Impairment charge | (2) | – | – | – | – | – | – | (2) | | Exchange and other adjustments | 2 | – | – | – | – | 1 | – | 3 | | **At 31st December 2006** | **(90)** | **(2)** | **(1)** | **–** | **(2)** | **(10)** | **(3)** | **(108)** | | **Net book value** | **125** | **77** | **4** | **–** | **9** | **112** | **20** | **347** | Impairment charges on internally generated and other software reflect impairment of certain capitalised IT assets following a review of the future economic benefits likely to be generated by them. Impairment charges detailed above have been included within other operating expenses. *** ## Notes to the accounts ### 24 Intangible assets (continued) | 2005 | Internally generated software £m | Other software £m | Core deposit intangibles £m | Brands £m | Customer lists £m | Licences and other £m | Total £m | | --- | --- | --- | --- | --- | --- | --- | --- | | **The Group** | | | | | | | | | | **Cost or valuation** | | | | | | | | | | At 1st January 2005 | 138 | 5 | – | – | 36 | 53 | 232 | | Acquisitions | – | 9 | 288 | 172 | 524 | 10 | 1,003 | | Additions | 68 | 23 | – | – | – | 82 | 173 | | Exchange and other adjustments | (18) | 6 | 18 | 11 | 22 | (6) | 33 | | **At 31st December 2005** | **188** | **43** | **306** | **183** | **582** | **139** | **1,441** | | **Accumulated amortisation and impairment** | | | | | | | | | | At 1st January 2005 | (84) | (3) | – | – | (2) | (4) | (93) | | Amortisation charge | (20) | (3) | (7) | (9) | (27) | (13) | (79) | | Impairment charge | (5) | (3) | – | – | – | (1) | (9) | | Exchange and other adjustments | 19 | (9) | – | – | – | (1) | 9 | | **At 31st December 2005** | **(90)** | **(18)** | **(7)** | **(9)** | **(29)** | **(19)** | **(172)** | | **Net book value** | **98** | **25** | **299** | **174** | **553** | **120** | **1,269** | | 2005 | Internally generated software £m | Other software £m | Core deposit intangibles £m | Brands £m | Customer lists £m | Licences and other £m | Total £m | | --- | --- | --- | --- | --- | --- | --- | --- | | **The Bank** | | | | | | | | | | **Cost or valuation** | | | | | | | | | | At 1st January 2005 | 100 | 2 | – | – | – | – | 102 | | Acquisitions | – | – | 7 | – | 10 | 6 | 23 | | Additions | 55 | – | – | – | – | – | 55 | | Exchange and other adjustments | (6) | 9 | – | – | – | 4 | 7 | | **At 31st December 2005** | **149** | **11** | **7** | **–** | **10** | **10** | **187** | | **Accumulated amortisation and impairment** | | | | | | | | | | At 1st January 2005 | (57) | (2) | – | – | – | – | (59) | | Amortisation charge | (13) | – | – | – | (1) | (1) | (15) | | Impairment charge | (5) | – | – | – | – | (1) | (6) | | Exchange and other adjustments | 9 | – | – | – | – | – | 9 | | **At 31st December 2005** | **(66)** | **(2)** | **(71)** | – | (1) | (2) | (71) | | **Net book value** | **83** | **9** | **7** | **–** | **9** | **8** | **116** | *** ## Notes to the accounts ### 25 Property, plant and equipment | 2006 | Property £m | Equipment £m | Operating leased assets £m | Total £m | Property £m | Equipment £m | Operating leased assets £m | Total £m | | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | **The Group** | | | | **The Bank** | | | | | **Cost** | | | | | | | | | | At 1st January 2006 | 2,450 | 2,541 | 365 | 5,356 | 1,972 | 1,580 | – | 3,552 | | Acquisitions and disposals | – | – | – | – | – | – | – | – | | Additions | 180 | 475 | – | 655 | 130 | 270 | – | 400 | | Disposals | (422) | (382) | – | (804) | (368) | (362) | – | (730) | | Fully depreciated assets written off | (1) | (89) | – | (90) | – | (89) | – | (89) | | Exchange and other adjustments | (53) | (116) | – | (169) | (3) | (16) | – | (19) | | **At 31st December 2006** | **2,154** | **2,429** | **365** | **4,948** | **1,731** | **1,383** | **–** | **3,114** | | **Accumulated depreciation and impairment** | | | | | | | | | | At 1st January 2006 | (1,022) | (1,575) | (5) | (2,602) | (914) | (1,121) | – | (2,035) | | Acquisitions and disposals | – | – | – | – | – | – | – | – | | Depreciation charge for year | (118) | (335) | (2) | (455) | (96) | (171) | – | (267) | | Impairment | (14) | – | – | (14) | (14) | – | – | (14) | | Disposals | 148 | 341 | – | 489 | 137 | 333 | – | 470 | | Fully depreciated assets written off | 1 | 89 | – | 90 | – | 89 | – | 89 | | Exchange and other adjustments | 12 | 26 | (2) | 36 | (3) | 4 | – | 1 | | **At 31st December 2006** | **(993)** | **(1,454)** | **(9)** | **(2,456)** | **(890)** | **(866)** | **–** | **(1,756)** | | **Net book value** | **1,161** | **975** | **356** | **2,492** | **841** | **517** | **–** | **1,358** | | 2005 | Property £m | Equipment £m | Operating leased assets £m | Total £m | Property £m | Equipment £m | Operating leased assets £m | Total £m | | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | **The Group** | | | | **The Bank** | | | | | **Cost** | | | | | | | | | | At 1st January 2005 | 2,303 | 2,026 | 361 | 4,690 | 1,943 | 1,468 | – | 3,411 | | Acquisitions as a result of business combinations | 126 | 159 | – | 285 | – | – | – | – | | Additions | 125 | 463 | – | 588 | 104 | 207 | – | 311 | | Disposals | (80) | (130) | – | (210) | (63) | (114) | – | (177) | | Fully depreciated assets written off | (1) | (1) | – | (2) | (1) | (1) | – | (2) | | Exchange and other adjustments | (23) | 24 | 4 | 5 | (11) | 20 | – | 9 | | **At 31st December 2005** | **2,450** | **2,541** | **365** | **5,356** | **1,972** | **1,580** | **–** | **3,552** | | **Accumulated depreciation and impairment** | | | | | | | | | | At 1st January 2005 | (978) | (1,429) | (1) | (2,408) | (862) | (1,079) | – | (1,941) | | Acquisitions as a result of business combinations | (1) | (1) | – | (2) | – | – | – | – | | Depreciation charge for year | (92) | (268) | (2) | (362) | (75) | (150) | – | (225) | | Disposals | 20 | 113 | – | 133 | 17 | 106 | – | 123 | | Fully depreciated assets written off | 1 | 1 | – | 2 | 1 | 1 | – | 2 | | Exchange and other adjustments | 28 | 9 | (2) | 35 | 5 | 1 | – | 6 | | **At 31st December 2005** | **(1,022)** | **(1,575)** | **(5)** | **(2,602)** | **(914)** | **(1,121)** | **–** | **(2,035)** | | **Net book value** | **1,428** | **966** | **360** | **2,754** | **1,058** | **459** | **–** | **1,517** | Operating leased assets represent assets such as plant and equipment leased to customers under operating leases. Certain of the Group’s equipment is held on finance leases. See note 42. Impairment of £14m follows a review of the future use of an existing office building in our UK property portfolio. In 2007, the freehold of the building will be disposed of by either a short- or long-term leaseback, depending on the conclusions of the review. Consequently the value has been written down to fair value, less cost of sale. *** ## Notes to the accounts ### 25 Property, plant and equipment (continued) The carrying value of property on transition to IFRS was the deemed cost. The following table shows the historical cost of property. | | 2006 £m | 2005 £m | | --- | --- | --- | | **Historical cost of property** | | | | At cost | 1,982 | 2,257 | | Accumulated depreciation and impairment | (958) | (1,050) | | **Net book value** | **1,024** | **1,207** | ### 26 Deposits from banks | | The Group | | The Bank | | | --- | --- | --- | --- | --- | | | 2006 £m | 2005 £m | 2006 £m | 2005 £m | | **Repayable:** | | | | | | on demand | 19,163 | 13,924 | 18,505 | 24,275 | | no more than three months | 55,534 | 54,620 | 78,579 | 58,451 | | over three months but not more than six months | 1,418 | 2,488 | 948 | 2,980 | | over six months but not more than one year | 891 | 1,168 | 326 | 1,268 | | over one year but not more than three years | 593 | 442 | 473 | 390 | | over three years but not more than five years | 1,406 | 725 | 1,375 | 667 | | over five years but not more than ten years | 367 | 1,288 | 366 | 1,288 | | over ten years | 190 | 472 | – | 240 | | **Deposits from banks** | **79,562** | **75,127** | **100,572** | **89,559** | | **By geographical area** | | | | | | United Kingdom | 14,292 | 7,307 | 22,245 | 25,673 | | Other European Union | 27,521 | 23,496 | 27,426 | 22,562 | | United States | 5,140 | 7,418 | 10,786 | 7,517 | | Africa | 4,508 | 4,192 | 2,290 | 1,516 | | Rest of the World | 28,101 | 32,714 | 37,825 | 32,291 | | **Deposits from banks** | **79,562** | **75,127** | **100,572** | **89,559** | | **Included above: due to subsidiaries** | **–** | **–** | **26,268** | **20,145** | For details on the effective rate of interest please refer to Note 53. *** ## Notes to the accounts ### 27 Customer accounts | | The Group | | The Bank | | | --- | --- | --- | --- | --- | | | 2006 £m | 2005 £m | 2006 £m | 2005 £m | | **Repayable:** | | | | | | on demand | 153,642 | 144,015 | 153,312 | 122,201 | | no more than three months | 89,079 | 72,590 | 107,989 | 78,498 | | over three months but not more than six months | 5,594 | 9,282 | 4,063 | 3,869 | | over six months but not more than one year | 3,604 | 2,606 | 855 | 2,119 | | over one year but not more than three years | 1,655 | 3,072 | 2,781 | 1,392 | | over three years but not more than five years | 1,436 | 1,503 | 6,936 | 6,542 | | over five years but not more than ten years | 807 | 2,223 | 1,412 | 1,732 | | over ten years | 937 | 3,393 | 5,637 | 3,523 | | **Customer accounts** | **256,754** | **238,684** | **282,985** | **219,876** | | **By geographical area** | | | | | | United Kingdom | 170,120 | 153,686 | 223,846 | 183,164 | | Other European Union | 21,260 | 19,038 | 21,673 | 12,192 | | United States | 17,903 | 16,690 | 23,898 | 11,500 | | Africa | 27,205 | 29,866 | 2,259 | 2,699 | | Rest of the World | 20,266 | 19,404 | 11,309 | 10,321 | | **Customer accounts** | **256,754** | **238,684** | **282,985** | **219,876** | | **Included above: due to subsidiaries** | **–** | **–** | **86,503** | **42,303** | For details on the effective rate of interest please refer to Note 53. ### 28 Financial liabilities designated at fair value | | The Group | The Bank | The Group | The Bank | | --- | --- | --- | --- | --- | | | 2006 £m | 2006 £m | 2005 £m | 2005 £m | | | Fair value | Fair value | Fair value | Fair value | | **Financial liabilities designated at fair value** | | | | | | Debt securities | 32,261 | 29,868 | 25,951 | 39,513 | | Deposits | 19,990 | 19,836 | 7,434 | 7,434 | | Other | 1,736 | 1,532 | – | – | | **Total financial liabilities designated at fair value** | **53,987** | **51,236** | **33,385** | **46,947** | Financial liabilities designated at fair value includes certain financial instruments that pay out the higher of a guaranteed amount or a notional plus a performance related amount. There were no significant gains or losses attributable to changes in either the Group’s or Bank’s own credit risk for financial liabilities designated at fair value in 2006 (2005: £nil). *** ## Notes to the accounts ### 29 Debt securities in issue | | The Group | | The Bank | | | --- | --- | --- | --- | --- | | | 2006 £m | 2005 £m | 2006 £m | 2005 £m | | **Bonds and medium-term notes repayable:** | | | | | | on demand | – | 14 | – | 14 | | no more than three months | 578 | 42 | 168 | 42 | | over three months but not more than six months | 311 | 3,571 | 310 | 2,989 | | over six months but not more than one year | 991 | 2,628 | 91 | 2,047 | | over one year but not more than three years | 5,243 | 5,626 | 518 | 929 | | over three years but not more than five years | 2,187 | 1,725 | 327 | 444 | | over five years but not more than ten years | 1,394 | 299 | 3 | 207 | | over ten years | 4,848 | 7,256 | 179 | 3,438 | | | 15,552 | 21,161 | 1,596 | 10,110 | | **Other debt securities in issue repayable:** | | | | | | on demand | 17 | 880 | 17 | 7 | | no more than three months | 70,227 | 54,070 | 40,635 | 30,894 | | over three months but not more than six months | 8,358 | 10,414 | 6,647 | 8,575 | | over six months but not more than one year | 4,320 | 6,149 | 2,264 | 3,988 | | over one year but not more than three years | 5,165 | 3,169 | 1,781 | 3,269 | | over three years but not more than five years | 1,611 | 1,151 | 78 | 34 | | over five years but not more than ten years | 2,623 | 7 | 4 | 7 | | over ten years | 3,264 | 6,327 | 1 | 108 | | | 95,585 | 82,167 | 51,427 | 46,882 | | **Debt securities in issue** | **111,137** | **103,328** | **53,023** | **56,992** | Debt securities in issue for the Group at 31st December 2006 included certificates of deposit of £52,800m (2005: £43,109m) and commercial paper of £26,546m (2005: £28,275m). Debt securities in issue for the Bank at 31st December 2006 included certificates of deposit of £47,765m (2005: £38,827m) and commercial paper of £4,028m (2005: £6,717m). Debt securities in issue included amounts raised from securitisations, which are described in Note 34. The average interest rate during 2006 for commercial paper was 4.9% (2005: 3.4%) and for negotiable certificates of deposit was 5.1% (2005: 3.5%). ### 30 Other liabilities | | The Group | | The Bank | | | --- | --- | --- | --- | --- | | | 2006 £m | 2005 £m | 2006 £m | 2005 £m | | Obligation under finance leases (Note 42) | 92 | 289 | 11 | 29 | | Sundry creditors | 4,118 | 6,131 | 13,311 | 12,344 | | Accruals and deferred income | 6,127 | 4,711 | 3,430 | 1,365 | | **Other liabilities** | **10,337** | **11,131** | **16,752** | **13,738** | Included in the above Group balances, £9,265m (2005: £8,998m) are expected to be settled within no more than 12 months after the balance sheet date and balances of £1,072m (2005: £2,133m) expected to be settled more than 12 months after the balance sheet date. Included in the above Bank balances, £9,90